Dr. Cr.

Accounts receivable $150,000

Allowance for doubtful accounts $ 2,500

Sales (all on credit) 850,000

Sales returns and allowances 40,000

Instructions

(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.

(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?

(c) What is the theoretical justification for each of the two allowance methods used to estimate bad debts?