Analyzing Bad Debt Expense
Response to the following problem:
In 2011, three years after it began operations, the Pearce Corporation 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
|
$ 1 2 5,000
|
$ 1 80,000
|
$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
|
300
|
0
|
|
2009 accounts
|
|
4,600
|
700
|
400
|
|
2010 accounts
|
|
|
6,200
|
1,000
|
|
2011 accounts
|
|
|
|
6,800
|
Required:
1. Prepare an analysis to determine Pearce's estimated bad debt expense percentage based upon the average relationship of actual bad debts to credit sales.
2. Prepare an analysis to determine Pearce's estimated percentage of allowance for doubtful accounts based on year-end accounts receivable.
3. What amount should Pearce 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?