Instructions Keegan Corporation\'s accounting records disclosed the following in
ID: 2586713 • Letter: I
Question
Instructions Keegan Corporation's accounting records disclosed the following information for 2016: Cash sales Net credit sales Accounts receivable (12/31/16) Allowance for doubtful accounts (12/31/16, prior to adjustment) $850,000 720,000 160,000 1,500 (debit) Keegan wishes to examine the effect of various alternative bad debt estimation policies. Required: 1. Prepare the adjusting entry that would be required under each of the following methods: a. Bad debts are estimated at 3% of net credit sales. b. Bad debts are estimated at 7.5% of gross accounts receivable. c. 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. Next Level Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.Explanation / Answer
a Baddebt expenses ($720,000*3%) $ 21,600 Allowance for doubtful accounts $ 21,600 b Baddebt expenses ($160,000*7.5%)+$1,500) $ 13,500 Allowance for doubtful accounts $ 13,500 c Amount % Baddebt expenses 160,000/2 = $80,000 3% $ 2,400 160,000/2/2 = $40,000 6% $ 2,400 160,000/2/2 = $40,000 20% $ 8,000 Baddebt expense $ 12,800 Baddebt expenses ($12,800+$1,500) $ 14,300 Allowance for doubtful accounts $ 14,300