Bad Debt Expense Calculations, week 5 discussion help

Just need a general response to the post below - doesn't have to be extravagant but enough to let the the professor know this it's understood.Bad Debt Expense CalculationsClass, One of my classes a fewterms ago asked for an example or a bit better explanation regardingcalculating Bad Debt Expenses. The following is what I have come upwith. There are three basic methods for handling the calculation of Bad Debt Expense: Direct Write OffMethod: Accounts Receivable are written off directly when it becomesobvious that the account holder will not pay. (This is not an accrualaccounting method so there is no Allowance for Doubtful Accounts.) Percentof Net Sales Method: This is an accrual accounting method. The Bad DebtExpense is calculated by multiplying the Net Sales (credit sales) by aspecific percentage. The results is the BadDebt Expense and is accrued directly into the Allowance for DoubtfulAccounts. NOTE: very important, there is no (that is NO) adjustment madeto the calculated Bad Debt Expense using this method. One more time,biggest error students make is to try to alter the calculated Bad DebtExpense by some balance that is left over from the prior accountingperiod. Do not make that mistake.AccountsReceivable Method: (Also similar methods are called Percent of AccountsReceivable Method or Ageing of Accounts Receivable): This is an accrualaccounting method. The amount of expected un-collectable accounts isdetermined based on an analysis of the Accounts Receivable. (Ie.,a percentage or an aging table of the year end balances in AccountsReceivable.) NOTE: very important, we MUST take into consideration anycurrent balance left over from the prior accounting period in theAllowance for Doubtful Accounts. The objective is to make an adjustingentry to record the Bad Debt Expense that will result in the Allowancefor Doubtful Accounts becoming the exact amount that was calculated asun-collectable.Make sure that you read the question or exam problem carefully to determine exactly which method you are required to use. Now for some examples: Direct Write Off Method: Lloyd Products learned the Joe Smuckhas just skipped town and traveled to a country without an extraditiontreaty with the US. Joe owes Lloyd $500. Prepare the appropriatedadjusting entry, Lloyd uses the Direct Write Off Method to account forbad debts.Bad Debt Expense500 Accounts Receivable, Joe Smuck500 Percent of Net Sales and Ageing of Accounts Receivable Methods:  Case: LloydProducts is undecided about which base to use in estimatingun-collectible accounts. On December 31, 2005, the balance in AccountsReceivable was $680,000 and net credit sales amounted to $3,900,000during 2005. An aging analysis of the accounts receivableindicated that $38,000 in accounts are expected to be un-collectible.Past experience has shown that about 1% of net credit sales eventuallyare un-collectible. The Allowance for Doubtful Accounts has anunadjusted debit balance on December 31, 2005 of $700. Percent of Net Sales Method: $3,900,000 * 1% = $39,000 bad debt expense.Dec 31Bad Debt Expense39,000 Allowance for Doubtful Accounts39,000 Note: I do not carewhat the current balance is in the Allowance for Doubtful Accounts whenusing the Percent of Net Sales Method. Make sure you remember this it iscritical. Accounts Receivable Method (Aging or Percent):Now it is critical to remember that you were already told the desiredadjusted balance for the Allowance for Doubtful Accounts. The aginganalysis tells us the we current expect that $38,000 of our current Accounts Receivable to be un-collectable. Use a T-account to figure the needed adjusting entry.Allowance for Doubtful AccountsUn adj bal Dec 31 700Adj entry 38,700Ending Balance 38,000Bad Debt ExpenseAdj entry 38,700 Note we are makingending balance in the Allowance for Doubtful Accounts to be equal to theamount of the expected (calculated) un-collectable accounts based onsome factor related to the Accounts Receivable.