An examination of the accounting records of the Keegan Corporation disclosed the following information for 2007:
Cash sales ............ $680,000
Net credit sales .......... 527,000
Accounts receivable (12/31/07) ... 190,000
Allowance for doubtful accounts (12/31/07, prior to adjustment) 1,500 (debit) Keegan wishes to examine the effect of various alternative bad debt estimation policies.
1. Prepare the adjusting entry that would be required under each of the following methods:
a. Bad debts are estimated at 1.4% of total sales (net).
b. Bad debts are estimated at 3% of net credit sales.
c. Bad debts are estimated at 7.5% of gross accounts receivable.
d. An aging of accounts receivable indicates that half of the outstanding accounts will incur a 3% loss, a quarter will incur a 6% loss, the remaining quarter will incur a 20% loss.
2. Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.
This question was answered on: Jul 11, 2017
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