Santana Rey, owner of Business Solutions, realizes that she needs to begin accounting for bad debts expense. Assume that Business Solutions has total revenues of $44,000 during the first three months of 2012, and that the Accounts Receivable balance on March 31, 2012, is $22,867.
Required
1. Prepare the adjusting entry needed for Business Solutions to recognize bad debts expense on March 31, 2012, under each of the following independent assumptions (assume a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31).
a. Bad debts are estimated to be 1% of total revenues. (Round amounts to the dollar.)
b. Bad debts are estimated to be 2% of accounts receivable. (Round amounts to the dollar.)
2. Assume that Business Solutions' Accounts Receivable balance at June 30, 2012, is $20,250 and that one account of $100 has been written off against the Allowance for Doubtful Accounts since March 31, 2012. If S. Rey uses the method prescribed in Part 1b, what adjusting journal entry must be made to recognize bad debts expense on June 30, 2012?
3. Should S. Rey consider adopting the direct write-off method of accounting for bad debts expense rather than one of the allowance methods considered in part 1? Explain.