In an attempt to include all relevant information for decision-making purposes, Merimore Company estimates bad debts using the aging method. However, for external reporting pur¬ poses, the company estimates bad debts as a percentage of credit sales. Merimore prepares monthly adjusting journal entries. From trends over the past five years, the company controller has estimated that 2 percent of monthly credit sales will prove to be uncollectible. Following are the monthly credit sales and bad debt write-offs for Merimore Company for 1996. Month Cash Collections Credit Sales Write-Offs January $ 1,200,000 $ 1,000,000 February 1,050,000 925,000 March 910,000 1,010,000 April 1,000,000 975,000 $ 87,000 May 875,000 950,000 June 1,080,000 1,200,000 July 950,000 1,150,000 52,000 August 1,011,000 1,075,000 September 1,105,000 1,025,000 October 980,000 980,000 November 1,100,000 900,000 December 865,000 750,000 100,000 Total $12,126,000 $11,940,000 $239,000 On December 31, 1996, the controller prepared the following aging of accounts receivable. Account Classification Balance Percent Uncollectii Current $ 700,000 2.0% 1-30 days past due 1,200,000 5.5 31-75 days past due 550,000 10.0 Over 75 days past due 800,000 25.0 The Allowance for Doubtful Accounts balance on Jan. 1, 1996, was a credit of $70,000. REQUIRED:

a. Prepare the adjusting journal entry necessary on December 31, 1996, so that the state¬ ments will be in accordance with the company’s external reporting policies. Remember that the company prepares monthly adjusting journal entries. Chapter 6 The Current Asset Classification, Cash, and Accounts Receivable 305

b. Compute the balance in Allowance for Doubtful Accounts after the entry in

(a) has been recorded and posted.

c. Compute the balance in Accounts Receivable as of January 1, 1996.

d. Prepare the December 31 adjusting entry for bad debts using the percentage of sales method and compute the estimated bad debts using the aging method.

e. Why would a company want to estimate bad debts using two different methods? Which of the two methods is more costly and time-consuming to implement? Which provides more useful information?