Question

Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 4 percent of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12 percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 6 percent, 31–90 days past due at 19 percent, and over 90 days past due at 26 percent. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet.

2018 Year-End Total for Organics Plus
Credit Sales	$1,840,000
Accounts Receivable	610,000

There is also additional information regarding the distribution of accounts receivable by age.

Past-Due Category	Accounts Receivable Total
0-30 days	$350,000
31-90 days	100,000
Over 90 days	160,000

Required:

A. Prepare the year-end adjusting entry for bad debt, using the (1) income statement method, (2) balance sheet method of receivables, and (3) balance sheet aging of receivables method.

Dec. 31 (1)		fill in the blank	fill in the blank
		fill in the blank	fill in the blank
Dec. 31 (2)		fill in the blank	fill in the blank
		fill in the blank	fill in the blank
Dec. 31 (3)		fill in the blank	fill in the blank
		fill in the blank	fill in the blank

B. What would be the result obtained when you calculate the bad debt expense and required allowance for doubtful accounts using the three methods and assumptions above?

a.	The difference between the highest result and the lowest result is only $8,000.
b.	The aging method gives the lowest result; the income statement method the highest.
c.	The balance sheet method gives a result that is between that of the other two methods.
d.	The income statement result is generally considered more accurate than the other methods.

Answer 1

A.

	Date	Account Titles	Debit	Credit
a	Dec. 31	Bad Debt Expense	$            73,600		=1840000*4%
		Allowance for Doubtful Accounts		$            73,600
b	Dec. 31	Bad Debt Expense	$            73,200		=610000*12%
		Allowance for Doubtful Accounts		$            73,200
c	Dec. 31	Bad Debt Expense	$            81,600		=350000*6%+100000*19%+160000*26%
		Allowance for Doubtful Accounts		$            81,600

B.
None of the choices seem to be correct