During 2011, Lacee Enterprises had gross sales of $247,000. At the end of 2011, Lacee had accounts receivable of $83,000 and a credit balance of $5,600 in Allowance for Bad Debts. Lacee has used the percentage of sales method to estimate the bad debt expense. For the past several years, the amount estimated to be uncollectible has been 3%.
Instructions:
1. Using the percentage of gross sales method, estimate the bad debt expense and make any necessary adjusting entries.
2. Assuming that 6% of receivables are estimated to be uncollectible and that Lacee decides to use the percentage of receivables method to estimate the bad debt expense, estimate the bad debt expense and make any adjusting entries.
3. Which of the two methods more accurately reflects the net realizable value of receivables? Explain.