In an attempt to include all relevant information for decision-making purposes, Merimore Company estimates bad debts using the aging method. However, for external reporting purposes, the company estimates bad debts as a percentage of credit sales. Merimore prepares monthly adjusting journal entries. From trends over the past five years, the company controller has estimated that 2 percent of monthly credit sales will prove to be un-collectible. Following are the monthly credit sales and bad debt write-offs for Merimore Company for 2017.

On December 31, 2017, the controller prepared the following aging of accounts receivable:

The allowance for doubtful accounts balance on January 1, 2017, was a credit of $70,000.

REQUIRED:
a. Prepare the adjusting journal entry necessary on December 31, 2017, so that the statements will be in accordance with the company€™s external reporting policies. Remember that the company prepares monthly adjusting journal entries.
b. Compute the balance in allowance for doubtful accounts after the entry in (a) has been recorded and posted.
c. Compute the balance in accounts receivable as of January 1, 2017.
d. Prepare the December 31 adjusting entry for bad debts using the aging method.
e. Why would a company want to estimate bad debts using two different methods? Which of the two methods is more costly and time-consuming to implement? Which provides more useful information?

Write-Offs Month Cash Collections Credit Sales $ 1,200,000 $ 1,000,000 January February 1,050,000 925,000 March 910,000 1,010,000 $ 87,000 April 975,000 1,000,000 May 875,000 950,000 June 1,080,000 1,200,000 July 950,000 1,150,000 52,000 August 1,011,000 1,075,000 September 1,025,000 1,105,000 October 980,000 980,000 November 1,100,000 900,000 December 750,000 865,000 100,000 $12,126,000 $11,940,000 $239,000 Total Account Classification Current Balance Percent Uncollectible $ 700,000 2.0% 1-30 days past due 1,200,000 5.5% 31-75 days past due 550,000 10.0% Over 75 days past due 800,000 25.0%