The accounting records of Sine. Com Limited provided the following for 20X9:
Balance in accounts receivable, 1 January 20X9 ........... $ 90,000
Balance in accounts receivable, 31 December 20X9.......... 120,000
Balance in allowance for doubtful accounts, 1 January 20X9.... 3,000 (cr.)
Accounts already written off as uncollectible during 20X9....... 5,500
Cash sales were $ 900,000, while credit sales were $ 650,000. Recently, Sine. Com’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 various alternatives with a view to selecting the most appropriate approach and related estimates. For analytical purposes, the following 20X9 alternative estimates have been developed for consideration:
a. Bad debts approximate 0.75% of credit sales.
b. Bad debts approximate 0.4% of total sales.
c. Six percent of the uncollected accounts receivable at year- end will be uncollectible.
d. Aging of the accounts receivable at the end of the period indicated that 80% would incur a 2% loss, while the remaining 20% would incur a 10% loss.
1. For each of the four alternatives listed above, give the following:
a. 20X9 adjusting entry
b. Ending 20X9 balance in the allowance account
c. An evaluation of the alternative
2. Explain which of the four alternatives you would recommend.