Cottonwood Equipment Company had credit sales of $7 million during 20X0. Most customers paid promptly (within 30 days), but a few took longer; an average of 1.1% of credit sales were never paid. On December 31, 20X0, accounts receivable were $480,000. The Allowance for Bad Debts account, before any recognition of 20X0 bad debts, had a $1,200 debit balance. Cottonwood produces and sells mountaineering equipment and other outdoor gear. Most of the sales (about 80%) come in the period of March through August; the other 20% is spread almost evenly over the other 6 months. Over the last 6 years, an average of 17% of the December 31 balance in accounts receivable has not been collected.
1. Suppose Cottonwood Equipment uses the percentage of sales method to calculate an allowance for bad debts. Present the accounts receivable and allowance accounts as they should appear on the December 31, 20X0, balance sheet. Give the journal entry required to recognize the bad debt expense for 20X0.
2. Repeat requirement 1, except assume that Cottonwood Equipment uses the percentage of ending accounts receivable method.
3. Which method do you prefer? Why?