Felbin Inc. is in the second quarter of its first year of operations, and it plans to use the allowance method to account for its receivables. The CFO of the company is evaluating three different approaches to the allowance method, and the impact that each may have on the company's financial statements. The CFO estimates sales for the year will be $4.75 million, with $4.5 million on credit. The tax rate for Felbin is 30%. The CFO asks you to prepare an analysis of what the year-end journal entries might look like under three different assumptions. Based on your analysis, the CFO will determine which one of the three independent approaches to take when recording bad debts expense at year-end.

Assumption 1: Income Statement Approach Felbin uses the income statement approach and estimates 2% of credit sales will be uncollectible. In the event economic conditions worsen during the year, the CFO would revise his uncollectible percentage to 3%.

Assumption 2: Balance Sheet Approach Felbin uses the balance sheet approach with estimated uncollectibles of 2% of ending receivables. This will result in an estimated charge to bad debt expense of $84,200. The uncollectible percentage would be increased to 2.5% if economic conditions worsen.

Assumption 3: Aging Approach As an alternative to the basic balance sheet approach, the CFO has drafted an estimated aging schedule (shown below). If economic conditions worsen, the CFO believes a one percentage point increase in the uncollectible percentages would be appropriate.

Days Outstanding	A/R Amount	Estimated Percent Uncollectible	Estimated $ Uncollectible	Percent if Economy Worsens
Less than 30 days	1,750,000	1%	17,500	2%
3060 days	1,395,000	3%	41,850	4%
61120 days	820,000	5%	41,000	6%
Greater than 120 days	245,000	20%	49,000	21%
Total			149,350

Using the CFO's estimate of sales and accounts receivable for the year, prepare the following proposed journal entries for the CFO to review:

A.) Assuming the Income Statement approach is used and economic conditions do not worsen, prepare the journal entry that would be made for the year.

B.) Assuming the Income Statement approach is used and economic conditions worsen, provide the journal entry that would be made for the year.

C.) Assuming the Balance Sheet approach is used and economic conditions worsen, provide the journal entry that would be made for the year.

D.) Assume the aging method is used. What is the expected charge to bad debt expense under the assumption that economic conditions worsen?

2) On January 1, 2016, Happy Tubs sold a hot tub to Monica, receiving a two-year, noninterest-bearing note in exchange for a hot tub that normally sells for $8,000. The note is for an amount that achieves an effective interest rate of 10% per year.

Required:

1. Prepare the journal entry to record the sale. 2. Prepare any adjusting entry necessary on December 31, 2016. 3. Prepare any adjusting entry necessary on December 31, 2017.