P6-4 Allowance for Bad Accounts Installment Jewelry Company has been in business for 5 years but has never had its LO 6.5 financial statements audited. Engaged to audit them for 2019. you find that the company's balance sheet carries AICPA no allowance for bad accounts. Bad accounts have been expensed as written-off and recoveries credited to income Adapted as collected. The company's policy is to write off at December 31 of each year those accounts on which no collec- tions have been received for three months. The installment contracts generally are for 2 years. On your recommendation, the company agrees to revise its accounts for 2019 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of credit sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table: Year of Sale Credit Sales Accounts Written Off Recoveries 2015 2016 2017 2018 2019 2015 $100,000 $550 $1,500 $ 500 2016 250,000 1,000 4,000 $1,200 $100 2017 300,000 1,300 4,500 $2,700 2018 325,000 1,500 5.000 2019 275,000 1,400 400 500 600 Accounts receivable at December 31, 2019, were as follows: 2018 credit sales $ 15,000 2019 credit sales 135,000 $150,000 Required: Prepare the adjusting journal entry or entries with appropriate explanations to set up the Allowance for Bad Accounts. (Support each item with organized computations; income tax implications should be ignored.)