Estimating and Recording Bad Debt Estimates and Write$-$Offs; Reporting of Accounts Receivable

At December $31,$ its annual year$-$end, the accounts of Sun Systems Inc. show the following.

Module

$$324,000$ in sales revenue for the year, of which one$-$sixth was on account.

$$1,620$ credit balance in Allowance for Doubtful Accounts, as of December $31$ of the prior year.

$$32,490$ debit balance in Accounts Receivable as of December $31$ of the current year $($prior to any write$-$offs

of uncollectible accounts during the current year$).$

$$1,890$ in uncollectible accounts to be written off as of December $31$ of the current year.

Aging schedule at December $31$ of the current year, showing the following breakdown of total accounts receivable

excluding amounts to be written off.

Required

a$.$ Prepare the entry to write off the uncollectible accounts.

b$.$ Prepare the adjusting entry on December $31$ to record bad debt expense for each of the following separate assumptions

concerning expected bad debt loss rates. Note: Treat each situation separately.

Bad debt expense is based on $1\mathrm{.}5\%$ of credit sales.

Allowance for doubtful accounts is based on $2\mathrm{.}5\%$ of total receivables at year$-$end.

Allowance for doubtful accounts is based on the following aging schedule: Not past due, $0\mathrm{.}5\%$; Past

due $1-60$ days, $1\%$; and Past due over $60$ days, $8\%.$

Bad debt expense is based on the direct write$-$off method $($assume entry in part a has not been recorded$).$

c$.$ Prepare the balance sheet disclosure showing accounts receivable less the allowance for doubtful accounts for each

assumption $1$ through $4$ of part b$.$ For assumption $4$ only, assume there is a zero balance in the allowance for doubtful

accounts on December $31$ of the prior year.

d$.$ For reporting purposes in looking at part b$,$ what is one limitation when using assumption $1$ and when using assumption

$4?$

Note: Do not use negative signs with any of your answers.