DejaVu Company has been in business for several years and has the following information for its operations in the current year:
Total credit sales………………………………..$3,000,000
Bad debts written off in the year……………… 60,000
Accounts receivable balance on December 31
(after writing off the bad debts above)………… 500,000
Required:
a. Assume that DejaVu Company decides to estimate its bad debts expense at 2% of credit sales:
i. What amount of bad debts expense will the company record if it has a credit balance (before adjustment) of $5,000 in its allowance for doubtful accounts on December 31?
ii. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its allowance for doubtful accounts on December 31?
b. Assume that DejaVu Company estimates its bad debts based on an aging analysis of its year-end accounts receivable, which indicates that a provision for uncollectible accounts of $40,000 is required:
i. What amount of bad debts expense will the company record if it has a credit balance (before adjustment) of $5,000 in its allowance for doubtful accounts on December 31?
ii. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its allowance for doubtful accounts on December 31?
c. What amount of bad debts expense will DejaVu report if it uses the direct write-off method of accounting for bad debts?
d. State the two main reasons for using the allowance method to account for bad debts, rather than the direct write-off method.