Problem 6-5 EED Ltd. began operations on January 1, 20x6. The company uses the allowance method of accounting for bad debt expense. Based on industry averages and its experience in 20x6, EED Ltd. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. On December 31, 20x6 there was a $2,000 credit balance in the allowance for doubtful accounts account and a $40,000 debit balance in the accounts receivable account. During 20x7 the following summarized transactions occurred: 1. Sold merchandise on credit for $500,000. 2. Wrote off uncollectible accounts receivable in the amount of $1,500. 3. Received cash of $400,000 in payment of outstanding accounts receivable. 4. On December 1, 20x7, an accounts receivable in the amount of $3,000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. The promissory note bears an interest rate of 12%. Required 1. Prepare journal entries to record the above transactions on the books of EED Ltd. In addition, prepare journal entries, if any, required at December 31, 20x7, to record bad debt expense for the year and accrue interest on the promissory note. 2. Suppose now that instead, EED Ltd. expects 2% of credit sales to be uncollectable. With all other data being the same from above, prepare the journal entries, if any, required at December 31, 20x7 to record bad debt expense for the year. (CGA Canada adapted)