Information related to Gustavo Company for 2012 is summarized below.
|
Total credit sales |
$1,100,000 |
|
Accounts receivable at December 31 |
369,000 |
|
Bad debts written off |
22,150 |
Instructions
(a) What amount of bad debts expense will Gustavo Company report if it uses the direct write off method of accounting for bad debts?
(b) Assume that Gustavo Company decides to estimate its bad debts expense to be 2% of credit sales. What amount of bad debts expense will Gustavo record if Allowance for Doubtful Accounts has a credit balance of $3,000?
(c) Assume that Gustavo Company decides to estimate its bad debts expense based on 6% of accounts receivable. What amount of bad debts expense will Gustavo Company record if Allowance for Doubtful Accounts has a credit balance of $4,000?
(d) Assume the same facts as in (c), except that there is a $2,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Gustavo record?
(e) What is the weakness of the direct write off method of reporting bad debts expense?