Gupta Electronic recorded $425,000 of credit sales during its first year of operation. Gupta reported $102,000 (Dr.) in Accounts Receivable and $2,800 (Dr.) in Allowance for Doubtful Accounts before the adjustments at the end of the year. The Accounts Receivable account has $65,000 that is current and $37,000 that is 30 days or older. The accountant is wondering which method to use to estimate the bad debts. She has two options:
(1) 3% of credit sales
(2) Aging of accounts receivable: 1 % of current Accounts Receivable, 20% of 30+.
1. Calculate the bad debt expense using
(1) The percentage of credit sales,
(2) The aging of accounts receivable.
2. Prepare the adjusting journal entry to record bad debt expense using the two different methods.
3. Explain the main differences between the two methods of estimating bad debts.