Natural Hair Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Natural Hair prepared the following aging-of-receivables schedule as of the end of business on December 31, 2012:

Natural Hair Company has a past history of uncollectible accounts by age category, as follows:
Age Class Percent Uncollectible
Not past due .......... 1%
1–30 days past due ....... 2
31–60 days past due ........ 8
61–90 days past due ...... 15
91–120 days past due ...... 35
Over 120 days past due ...... 80

Instruction
1. Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule.
2. Assume that the allowance for doubtful accounts for Natural Hair Company has a negative balance of 2$3,500 before adjustment on December 31, 2012. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts.
3. Natural Hair Company reported credit sales of $5,000,000 during 2012. Assume that instead of using the analysis of receivables method of estimating uncollectible accounts, Natural Hair Company uses the percent of sales method and estimates that 1.25% of sales will be uncollectible. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts using the percent of sales method.
4. Assume that on March 4, 2013, Natural Hair wrote off the $4,350 account of Top Dog Images as uncollectible. Illustrate the effect on the accounts and financial statements of the write-off of the Top Dog Images account.
5. Assume that on August 17, 2013, Top Dog Images paid $4,350 on its account. Illustrate the effect on the accounts and financial statements of reinstating and collecting the Top Dog Images account.
6. Assume that instead of using the allowance method, Natural Hair uses the direct write-off method. Illustrate the effect on the accounts and financial statements of the following:
a. The write-off of the Top Dog Images account on March 4, 2013.
b. The reinstatement and collection of the Top Dog Images account on August 17, 2013.
7. Does Amazon.com use the direct write-off or allowance method of accounting for uncollectible accounts receivable?Explain.

Transcribed Image Text:

Not Past Due 1-30 31-60 61-90 91-120 Over 120 Days Past Due 3 Customer 4 AAA Beauty 19,500 5 Amelia's Wigs8,000 19,500 8,000 30 Zim's Beauty 31 Totals 6,100 880,000 575,000 140,500 82,700 36,000 25,000 20,800 6,100