The trial balance before adjustment of Risen Company reports the following balance:

Accounts Receivable Dr. $150,000

Allowance for Doubtful Accounts Cr. $2,500

Sales (all on credit) Cr. $850,000

Sales Return and Allowances Dr. $40,000

Instructions

a) Prepare the entires for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.

b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?

c) What is the theoretical justification for each of the two allowance methods used to estimate bad debts?