Reference no: EM132882145

Problem - Estimating Bad Debts - Keegan Corporation's accounting records disclosed the following information for 2019:

Cash sales $850,000

Net credit sales 720,000

Accounts receivable (12/31/2019) 160,000

Allowance for doubtful accounts (12/31/2019, prior to adjustment) 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. Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.