Problem - Adriana Lopez, owner of Success Systems, realizes that she needs to begin accounting for bad debts expense. Assume that Success Systems has total revenues of $43,853 during the first three months of 2010, and that the Accounts Receivable balance on March 31, 2010, is $22,720.
Required
1. Prepare the adjusting entry needed for Success System to recognize bad debts expense on March 31, 2010, 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 amount to the dollar).
b. Bad debts are estimated to be 2% of account receivable. (Round amount to the dollar.)
2. Assume that Success Systems' Account Receivable balance at June 30, 2010, is $ 20,250 and that one account of $ 100 has been written off against the Allowance for Doubtful Accounts since March 31, 2010. If Lopez uses the method prescribed in Part 1b, what adjusting journal entry must be made to recognize bad debts expense on June 30, 2010?
3. Should Lopez 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.