Having just graduated with a business degree, you're excited to begin working as a junior accountant at Sunny Optics, Inc. The company supplies lenses, frames, and sunglasses to opticians and retailers throughout the country. Sunny Optics is currently in the process of finalizing its third quarter (Q3) operating results. All Q3 adjusting entries have been made, except for bad debt expense. The preliminary income statement for Q3 is shown below, along with reported results for Q2 and Q1.

The corporate controller has asked you to examine the Allowance for Doubtful Accounts and use the aged listing of accounts receivable to determine the adjustment needed to record estimated bad debts for the quarter. The controller states that "Although our customers are somewhat slower in paying this quarter, we can't afford to increase the Allowance for Doubtful Accounts. If anything, we need to decrease it-an adjusted balance of about $8,000 is what I'd like to see. Play around with our estimated bad debt loss rates until you get it to work."
You were somewhat confused by what the controller had told you, but you chalked it up to your lack of experience and decided to analyze the Allowance for Doubtful Accounts. You summarized the transactions recorded in the Allowance for Doubtful Accounts using the T-account below:

Required:
1. What bad debts estimate for Q3 will produce the $8,000 balance that the controller would like to see?
2. Prepare the adjusting journal entry that would be required to record this estimate. 3. If the entry in requirement 2 is made, what does it do to the Q3 income and the trend in earnings? (Assume that Income Tax Expense does not change.)
4. Reconsider the statement the controller made to you. Is his suggestion a logical way to use the aging method to estimate bad debts?
5. What would be the Q3 net income if the Bad Debt Expense estimate was 4.5 percent of sales, as in Q2? What would this do to the trend in net income across the three quarters?
(Assume that Income Tax Expense does not change.)
6. Is there any evidence of unethical behaviour in this case? Explain your answer.

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SUNNY OPTICS, INC. Quarterly Income Statements (in thousands of dollars) Q2 (preliminary) (as reported) (as reported) Q3 Q1 Net Sales $135,800 $135,460 $130,100 Cost of Goods Sold 55,990 74,110 58,400 58,250 77,210 Gross Profit 77,400 Selling, General, and Administrative Expenses Bad Debt Expense Income before Income Tax Expense Income Tax Expense 56,560 53,975 53,690 6,050 4,200 20,840 17,185 16,220 5,620 $ 15,220 5,155 $ 12,030 5,020 $ 11,200 Net Income Allowance for Doubtful Accounts (xA) January 1 bal. fwd. QI Bad debts estimate 7,900 QI Write-offs 4,110 4,200 7,990 4,120 6,050 March 31 adjusted Q2 Bad debts estimate Q2 Write-offs 9,920 June 30 adjusted Q3 Write-offs 4,030 September 30 unadjusted 5,890