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 , and that the Accounts Receivable balance on , is $22,867. Required
1. Prepare the adjusting entry needed for Business Solutions to recognize bad debts expense on , under each of the following independent assumptions .
a. Bad debts are estimated to be 1% of total revenues.
b. Bad debts are estimated to be 2% of accounts receivable.
2. Assume that Business Solutions' Accounts Receivable balance at , is $20,250 and that one account of $100 has been written off against the Allowance for Doubtful Accounts since. If S. Rey uses the method prescribed in Part 1b, what adjusting journal entry must be made to recognize bad debts expense on ?
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.