Information related to Hamilton plc for 2017 is summarized below.
Total credit sales.........................................£2,500,000
Accounts receivable at December 31.....................970,000
Bad debts written off........................................66,000
Instructions
(a) What amount of bad debt expense will Hamilton report if it uses the direct write-off method of accounting for bad debts?
(b) Assume that Hamilton estimates its bad debt expense to be 3% of credit sales. What amount of bad debt expense will Hamilton record if it has an Allowance for Doubtful Accounts credit balance of £4,000?
(c) Assume that Hamilton estimates its bad debt expense based on 7% of accounts receivable. What amount of bad debt expense will Hamilton record if it has an Allowance for Doubtful Accounts credit balance of £3,000?
(d) Assume the same facts as in (c), except that there is a £3,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debt expense will Hamilton record?
(e) What is the weakness of the direct write-off method of reporting bad debt expense?