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Shimmer Products is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 5.6% of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 13.7% percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 5%, 31–90 days past due at 21%, and over 90 days past due at 30%. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. There is also additional information regarding the distribution of accounts receivable by age. Prepare the year-end adjusting entry for bad debt, using A. Income statement method B. Balance sheet method of receivables C. Balance sheet aging of receivables method D. Which method should the company choose, and why?

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 9, Problem 15PB
Textbook Problem
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Shimmer Products is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 5.6% of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 13.7% percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 5%, 31–90 days past due at 21%, and over 90 days past due at 30%. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet.

Chapter 9, Problem 15PB, Shimmer Products is considering which bad debt estimation method works best for its company. It is , example  1

There is also additional information regarding the distribution of accounts receivable by age.

Chapter 9, Problem 15PB, Shimmer Products is considering which bad debt estimation method works best for its company. It is , example  2

Prepare the year-end adjusting entry for bad debt, using

A. Income statement method

B. Balance sheet method of receivables

C. Balance sheet aging of receivables method

D. Which method should the company choose, and why?

To determine

(a)

Introduction:

Journal entries record business transactions. These transactions have double effect on accounts such that total of all assets equate with liabilities and equities.

To journalize:

Estimated bad debts using the income statement method.

Explanation of Solution

Record estimated bad debts using income statement method:

Date Account Debit ($) Credit($)
Dec. 31 Bad Debt Expense ($2,410,000×5
To determine

(b)

To journalize:

Estimated bad debts using the balance sheet method.

To determine

(c)

To journalize:

Estimated bad debt using balance sheet aging method.

To determine

(d)

To identify:

The method which should be choose by the company also explain the reason.

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Chapter 9 Solutions

Principles of Accounting Volume 1
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