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

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Chart of Accounts

CHART OF ACCOUNTS

Keegan Corporation

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
122	Allowance for Doubtful Accounts
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

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General Journal

	Prepare the adjusting entry on December 31 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.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1		Adjusting Entries
2
3
4
5
6
7

Solution

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1		Adjusting Entries
2
3
4
5
6
7

Points:

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Explanation