Information related to Gustavo Company for 2012 is summarized below.
Total credit sales $1,100,000
Accounts receivable at December 31 369,000
Bad debts written off 22,150
Instructions
(a) What amount of bad debts expense will Gustavo Company report if it uses the direct write-off method of accounting for bad debts?
(b) Assume that Gustavo Company decides to estimate its bad debts expense to be 2% of credit sales. What amount of bad debts expense will Gustavo record if Allowance for Doubtful Accounts has a credit balance of $3,000?
(c) Assume that Gustavo Company decides to estimate its bad debts expense based on 6% of accounts receivable. What amount of bad debts expense will Gustavo Company record if Allowance for Doubtful Accounts has a credit balance of $4,000?
(d) Assume the same facts as in (c), except that there is a $2,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Gustavo record?
(e) What is the weakness of the direct write-off method of reporting bad debts expense?