Final answer:
To recognize bad debts, an adjusting entry needs to be made with the Hawke Company's accounts. For assumption a, the bad debts are estimated to be 1.5% of credit sales, resulting in a Bad Debts Expense of $85,230. For assumption b, the bad debts are estimated to be 1% of total sales, resulting in a Bad Debts Expense of $75,870.
Step-by-step explanation:
To recognize bad debts, we need to make an adjusting entry to the Hawke Company's accounts.
a. Bad debts are estimated to be 1.5% of credit sales:
To calculate the amount of bad debts, we multiply the credit sales figure by the estimated percentage:
Bad Debts = Credit Sales * Estimated Percentage
Bad Debts = $5,682,000 * 1.5%
Then we need to record the entry to recognize the bad debts by debiting the Bad Debts expense account and crediting the Allowance for Doubtful Accounts account:
Bad Debts Expense $85,230
Allowance for Doubtful Accounts $85,230
b. Bad debts are estimated to be 1% of total sales:
In this case, we need to calculate the total sales amount by adding the cash sales and credit sales figures:
Total Sales = Cash Sales + Credit Sales
Total Sales = $1,905,000 + $5,682,000
Then, we multiply the total sales figure by the estimated percentage to calculate the bad debts:
Bad Debts = Total Sales * Estimated Percentage
Bad Debts = $7,587,000 * 1%
Again, we record the entry to recognize the bad debts by debiting the Bad Debts expense account and crediting the Allowance for Doubtful Accounts account:
Bad Debts Expense $75,870
Allowance for Doubtful Accounts $75,870