Nolte Products Is Undecided About Which Basis to Use in Estimating

question 193

Essay

Nolte Products is undecided about which basis to use in estimating uncollectible accounts. On December 31, 2014, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,700,000 during 2014. An aging analysis of the accounts receivable indicated that $39,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.
Instructions
Prepare the adjusting entries to record estimated bad debts expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions:
(a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment.
(b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment.

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Definitions:

Afterimages

Visual illusions that occur after looking at an image for a prolonged period and then seeing a residual image when looking away.

Sensory Adaptation

The process by which sensory receptors become less sensitive to constant stimuli over time, leading to a decrease in responsiveness.

Subliminal Stimulation

The process of influencing an individual's mind and behavior by presenting stimuli below the threshold of conscious awareness.

Absolute Threshold

The lowest level of stimulus strength needed to notice a specific stimulus half of the time.