In 2014, three years after it began operations, Pearce Corporation decided to change from the direct write-off method of recording bad debts to estimating bad debts. The following information is available:

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 from 2011-2013.
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 2014 under the following assumptions?
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.
4. Next Level Assume that Pearce estimates bad debt as a percentage of credit sales. How would Pearce estimate 2014 bad debt expense if losses from uncollectible accounts for 2014 were $25,000? What other action might management consider?

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Year 2011 2012 2013 2014 Sales Credit sales Collections on accounts receivable $125,000 $180,000 158,000 $250,000 210,000 $280,000 235,000 90,000 2011 sales 2012 sales 2013 sales 2014 sales 78,000 8,500 200 137,000 15,000 178,800 300 19,500 200,000 Accounts receivable written off 500 4,600 2011 accounts 2012 accounts 2013 accounts 2014 accounts 2,500 300 700 6,200 400 1,000 6,800