The Installment Jewelry Company has been in business for 5 years but has never had an audit made of its financial statements. Engaged to make an audit for 2007, you find that the company's balance sheet carries no allowance for bad accounts, bad accounts having been expensed as written off and recoveries credited to income as collected. The company's policy is to write off at December 31 of each year those accounts on which no collections have been received for 3 months. The installment contracts generally are for 2 years. On your recommendation the company agrees to revise its accounts for 2007 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table:

Accounts receivable at December 31, 2007 were as follows:
2006 Sales ...... $ 15,000
2007 Sales ...... 135,000
$150,000
Required
Prepare the adjusting journal entry or entries with appropriate explanations to set up the Allowance for Bad Accounts. (Support each item with organized computations; income tax implications should beignored.)

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Charge Accounts Written Off and Year of Sale Recoveries and Year of Sale Sales $100,000 250,000 2003 550 (2003) (2004) 1,500 $1,000 (2003) (2004) (2005) 2003 2003 $100 2004 400 (2005) 500 (2006) 600 2004 2005 300,000 500 4,000 $1,300 (2004) (2005) (2006) 4,500 (2005) (2006) (2007) 5,000 2006 325,000 1,200 1,500 2007 275,000 2,700 1,400