Keegan Corporation’s accounting records disclosed the following information for 2016:
Cash sales ......................$850,000
Net credit sales .................... 720,000
Accounts receivable (12/31/16) .............. 160,000
Allowance for doubtful accounts (12/31/16, 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.