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Problem - In 2011, three years after it began operations, Michel Enterprises decided to change from the direct write-off method of recording bad debts to estimating bad debts. The following information is available to you:
Year
2008
2009
2010
2011
Sales
$125,000
$180,000
$250,000
$280,000
Credit Sales
90,000
158,000
210,000
235,000
Collections on accounts receivable
2008 Sales
78,000
8,500
200
2009 Sales
137,000
15,000
300
2010 Sales
178,800
19,500
2011 Sales
200,000
Accounts receivable written off
2008 accounts
2,500
500
-
2009 accounts
4,600
700
400
2010 accounts
6,200
1,000
2011 accounts
6,800
Required -
1. Prepare an analysis to determine Michel's estimated bad debt expense percentage based upon the average relationship of actual bad debts to credit sales.
2. Prepare an analysis to determine Michel's estimated percentage of allowance for doubtful accounts based on year-end accounts receivable.
3. What amount should Michel record as bad debts expense for 2011 if:
a. Bad debts are estimated as a percentage of credit sales?
b. Allowance for doubtful accounts is estimated as a percentage of outstanding year-end accounts receivable?
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