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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Estimating Bad Debts Keegan Corporation’s accounting records disclosed the following information for 2019:

Chapter 6, Problem 3P, Estimating Bad Debts Keegan Corporations accounting records disclosed the following information for

Keegan wishes to examine the effect of various alternative had debt estimation policies.

Required:

  1. 1. Prepare the adjusting entry that would be required under each of the following methods:
    1. a. Bad debts are estimated at 3% of net credit sales.
    2. b. Bad debts are estimated at 7.5% of gross accounts receivable.
    3. 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. 2. Next Level Discuss the difference between the income statement and balance sheet approaches to estimating bad debts.

1. a

To determine

Record the adjusting entry if “bad debts are estimated at 3% of net credit sales”.

Explanation

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

Adjustment entries:

Adjusting entries are those entries which are made at the end of the year to update all the balances in the financial statements to show the true financial information and to maintain the records according to accrual basis principle.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses...

1. b

To determine

Record the adjusting entry if “bad debts are estimated at 7.5% of gross accounts receivable”.

1. c

To determine

Record the adjusting entry if “an aging of accounts receivable specifies that half of the outstanding accounts will incur a 3% loss, a quarter will incur a 6% loss, and the remaining quarter will incur a 20% loss”.

2.

To determine

Explain the difference between the income statement and balance sheet approaches to estimating bad debts.

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