Problem 5 (10 points) The trial balance before adjustment of ABC Company reports the following balances:

Accounts receivable Dr. $300,000 Allowance for doubtful accounts Cr. $ 5,000 Sales revenue (all on credit) Cr. 1,700,000 Sales returns and allowances Dr.80,000 Required:

a) Prepare the entry for estimated bad debts assuming that doubtful accounts are estimated to be 6% of gross accounts receivable.

b) Prepare the entry for estimated bad debts assuming that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $5,000 instead of a credit balance.

c) What is the theoretical justification for the percentage-of-receivables method used to estimate bad debts?