Keegan Corporation’s accounting records disclosed the following information for 2019:Cash sales$850,000 Net credit sales720,000 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.Next Level Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.

The question is based on the concept of Financial Accounting.The income statement methodology is a way of calculating bad debts using sales or credit sales as a baseline. The benefit of this method is that it matches the bad debt expense of the previous financial period while employing a current performance benchmark, such as sales or credit sales. However, one disadvantage of this procedure is that it is time-consuming, does not take into consideration the age of the accounts receivable and hence may undervalue the risk. The balance sheet methodology is a way of estimating bad debts using a percentage of the accounts receivable value. This method allows for the accurate net realizable value of receivables to be reported on the balance sheet, especially if an ageing study has been performed. The downside of this strategy is that it matches the bad debt expense of previous periods to the current period's sales revenue.

Answered: Keegan Corporation’s accounting records…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Concept explainers

Question

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.	Next Level Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions