Orlando Bloom conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt ratio has been approximately 11/2% of sales. In recent discussions with his bookkeeper, Mr. Bloom has become confused by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance.

The following information has been shown.

1. An allowance can be set up

(a) On the basis of a percentage of sales or

(b) On the basis of a valuation of all past due or otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at the close of the accounting period, or specific items can be charged off directly against

(1) Gross Sales or to

(2) Bad Debt Expense in the year in which they are determined to be uncollectible.

2. Collection agency and legal fees, and so on, incurred in connection with the attempted recovery of bad debts can be charged to

(a) Bad Debt Expense,

(b) Allowance for Doubtful Accounts,

(c) Legal Expense, or

(d) General Expense.

3. Debts previously written off in whole or in part but currently recovered can be credited to

(a) Other Revenue,

(b) Bad Debt Expense, or

(c) Allowance for Doubtful Accounts.

Instructions

Which of the foregoing methods would you recommend to Mr. Bloom in regard to

(1) Allowances and charge-offs,

(2) Collection expenses, and

(3) Recoveries?

State briefly and clearly the reasons supporting your recommendations.