Chapter 8, Problem 8.3E

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

During the year ended December 31, 2015, Kelly’s Camera Shop had sales revenue of $170,000, of which $85,000 was on credit. At the start of 2015, Accounts Receivable showed a $10,000 debit balance and the Allowance for Doubtful Accounts showed a $600 credit balance. Collections of accounts receivable during 2015 amounted to $68,000.

Data during 2015 follow:

1. a. On December 10, a customer balance of $1,500 from a prior year was determined to be uncollectible, so it was written off.
2. b. On December 31, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2 percent of credit sales for the year.

Required:

1. 1. Give the required journal entries for the two events in December.
2. 2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the balance sheet and income statement for 2015.
3. 3. On the basis of the data available, does the 2 percent rate appear to be reasonable? Explain.