Recording, Reporting, and Evaluating a Bad Debt Estimate
During 2011, Dorothy’s Ceramics Shop had sales revenue of $70,000, of which $25,000 was on credit. At the start of 2011, Accounts Receivable showed a $4,000 debit balance, and the Allowance for Doubtful Accounts showed a $300 credit balance. Collections of accounts receivable during 2011 amounted to $19,000.
Data during 2011 follows:
a. On December 31, 2011, an Account Receivable (Toby’s Gift Shop) of $700 from a prior year was determined to be uncollectible; therefore, it was written off immediately as a bad debt.
b. On December 31, 2011, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2.5 percent of credit sales for the year.
Required:
1. Give the required journal entries for the two items on December 31, 2011 (end of the accounting period).
2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the income statement and balance sheet for 2011. Disregard income tax considerations.
3. On the basis of the data available, does the 2.5 percent rate appear to be reasonable? Explain.