Max Corporation is closing its accounting books and records for the year 2015. All sales at Max are made on credit. The unadjusted trial balance of the company includes the following balances at 31
December 2015:
Dr. Cr.
Sales returns and allowances ........................................................... $22,500(dr)
Sales ................................................................................................ $ 510,000(cr)
Allowance for doubtful accounts ................................................... 2,625(cr)
Accounts receivable ........................................................................ 112,500Dr
During the year, Max Corp. estimates bad debt expense and the allowance for doubtful accounts using a percentage of sales, and then, at year-end, after a careful and detailed analysis of the collectability of accounts receivable, adjusts the balance of the allowance for doubtful accounts.
Required:
1. Prepare and present the entry for estimated bad debts and the allowance for doubtful accounts for the year assuming that doubtful accounts are estimated to be 1% of net sales.
2. After the entry in 1 above relating to the estimate is made, Max performs a detailed analysis of the aged accounts receivable and determines that an allowance for doubtful accounts of $6,000 is required based on that analysis in order to finalize the allowance for doubtful accounts on the 31 December 2015 statement of financial position. Present the entry, if any is necessary, to make this adjustment.
3. Assume that all the information above about Max's procedures and balances is the same, except that the allowance for doubtful accounts has an unadjusted debit balance of $2,625 instead of a credit balance of $2,625. Re-calculate the requirements presented in 1 and 2 above using this alternative balance in the allowance for doubtful accounts.