Indicate whether each statement best describes the allowance (A) method or the direct write-off (DW) method.

$\underline{\qquad}$ 1. Does not predict bad debts expense.

$\underline{\qquad}$ 2. Accounts receivable on the balance sheet is reported at net realizable value.

$\underline{\qquad}$ 3. The write-off of a specific account does not affect net income.

$\underline{\qquad}$ 4. When an account is written off, the debit is to Bad Debts Expense.

$\underline{\qquad}$ 5. Usually does not best match sales and expenses because bad debts expense is not recorded until an account becomes uncollectible, which usually occurs in a period after the credit sale.

$\underline{\qquad}$ 6. Estimates bad debts expense related to the sales recorded in that period.

Accounts receivable transactions and bad debts adjustments

Sherman Co. began operations in Year $1$. During its first two years, the company completed several transactions involving sales on credit, accounts receivable collections, and bad debts. These transactions are summarized as follows.

Year 1

a. Sold $\$685,350$ of merchandise on credit (that had cost $\$500,000$), terms n/$30$.

b. Received $\$482,300$ cash in payment of accounts receivable.

c. Wrote off $\$9,350$ of uncollectible accounts receivable.

d. In adjusting the accounts on December $31$, the company estimated that $1\%$ of accounts receivable would be uncollectible.

Year 2

e. Sold $\$870,220$ of merchandise on credit (that had cost $\$650,000$), terms n/$30$.

f. Received $\$990,800$ cash in payment of accounts receivable.

g. Wrote off $\$11,090$ of uncollectible accounts receivable.

h. In adjusting the accounts on December $31$, the company estimated that $1\%$ of accounts receivable would be uncollectible.

Required

Prepare journal entries to record Sherman’s summarized transactions and its year-end adjusting entries to record bad debts expense. (The company uses the perpetual inventory system, and it applies the allowance method for its accounts receivable.)

Refer to the information in the previous exercise to complete the following requirements.

c. Prepare the adjusting entry to record bad debts expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $1,000 debit.

Dexter Company uses the direct write-off method. Prepare journal entries to record the following transactions.

Mar. 11 - Dexter determines that it cannot collect $45,000 of its accounts receivable from Leer Co.

        29 - Leer Co. unexpectedly pays its account in full to Dexter Company. Dexter records its recovery of this bad debt.

Refer to the information in the previous exercise to complete the following requirements.

b. Prepare the adjusting entry to record bad debts expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $12,000 credit.