The accounting records of 2Com Ltd. show the following for 2012:
Balance in accounts receivable, January 1, 2012……………………………..$ 90,000
Balance in accounts receivable, December 31, 2012………………………….120,000
Balance in allowance for doubtful accounts January 1, 2012……………………3,000
Bad debts expense before year-end adjustment, December 31, 2012………..4,500 dr*
Accounts written off as uncollectible during 2012…………………………...2,500 **
Cash sales were $900,000, while credit sales were $650,000. Recently, 2Com’s management has become concerned about various estimates used in its accounting system, including those relating to receivables and uncollectible accounts. The company is considering two alternatives.
For the purpose of comparing these two alternatives, the company has made the following estimates for each alternative.
■ Alternative 1: Bad debts approximating 0.75% of credit sales.
■ Alternative 2: Aging of the accounts receivable at the end of the period, where 80% would incur a 2% loss, while the remaining 20% would incur a 10% loss.
Required:
For each of the two alternatives listed above, calculate the bad debts expense for 2012 and the allowance for doubtful accounts balance at the end of 2012.