Nolte Products Is Undecided About Which Base to Use in Estimating

question 18

Essay

Nolte Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2010, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,500,000 during 2010. An aging analysis of the accounts receivable indicated that $36,000 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:

Loan Cost

The total expense that a borrower incurs to take out a loan, including interest rates, fees, and any other charges.

Short-Term Loans

Short-term loans are financial obligations due for repayment within a year, often utilized for immediate cash flow needs.

Fixed Assets

Tangible or intangible items owned by a business that are used over a long period of time for the operation of the business, such as buildings, machinery, or equipment.

Working Capital

The disparity between an organization's immediate assets and liabilities, revealing its short-term fiscal stability and operational effectiveness.