P5-5 (AfDA, Bad Debt Expense, Credit Sales Method, Aging Method)

Beta Company has been in business for several years and has the following information for its operations in the current year:

REQUIRED:

1. Assume that Beta Company decides to estimate its bad debts expense at 2% of credit sales.

   1. What amount of bad debts expense will be recorded if it has a credit balance (before

      adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?

   2. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?

2. Assume that Beta Company estimates its bad debts based on an aging analysis of its year- end accounts receivable, which indicates that a provision for uncollectible accounts of $40,000 is required.

   1. What amount of bad debts expense will be recorded if it has a credit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?

   2. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?

3. What amount of bad debts expense will Beta report if it uses the direct write-off method of accounting for bad debts?

4. State the two main reasons for using the allowance method to account for bad debts, rather than the direct write-off method.