E6-21

Recording, Reporting, and Evaluating a Bad Debt Estimate Using the Percentage of Credit Sales Method

During the current year, Robbys Camera Shop had sales revenue of $170,000, of which $75,000 was on credit. At the start of the current year, Accounts Receivable showed a $16,000 debit balance and the Allowance for Doubtful Accounts showed a $900 credit balance. Collections of accounts receivable during the current year amounted to $60,000.

Data during the current year follow:

1. On December 31, an Account Receivable (J. Doe) of $1,700 from a prior year was determined to be uncollectible; therefore, it was written off immediately as a bad debt.
2. On December 31,on the basis of experience,a decision was made to continue the accounting policy of basing estimated bad debt losses on 1.5 percent of credit sales for the year.

Required:

1. Give the required journal entries for the two items on December31, the 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 the current year. Disregard income tax considerations.
3. On the basis of the data available, does the 1.5 percent rate appear to be reasonable? Explain. CAN YOU EXPLAIN ME THIS STEP-BY STEP PLEASE WITH explanations FOR WHY WE ARE DOING EACH THING.