Question

Entries for Bad Debt Expense under the Direct Write-Off and Allowance Methods

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:

Apr. 13	Wrote off account of Dean Sheppard, $3,370.
May 15	Received $1,690 as partial payment on the $4,480 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July 27	Received $3,370 from Dean Sheppard, whose account had been written off on April 13. Reinstated the account and recorded the cash receipt.
Dec. 31	Wrote off the following accounts as uncollectible (record as one journal entry):
	Paul Chapman $2,260 Duane DeRosa 1,690 Teresa Galloway 1,010 Ernie Klatt 1,420 Marty Richey 510
Dec. 31	If necessary, record the year-end adjusting entry for the uncollectible accounts.

For those amount boxes in which no entry is required, leave the box blank. If an entry is not required, select "No entry" from the dropdown box(es).

a. Journalize the transactions under the direct write-off method.

Apr. 13
May 15
July 27-reinstate
July 27-collection
Dec. 31-write-off
Dec. 31-adjusting

b. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, 3% of credit sales are expected to be uncollectible. Shipway Company recorded $548,500 of credit sales during the year.

Journalize the transactions under the allowance method.

Apr. 13
May 15
July 27-reinstate
July 27-collection
Dec. 31-write-off
Dec. 31-adjusting

c. How much higher (lower) would Shipway Company's net income have been under the direct write-off method than under the allowance method?
  by $

Answer 1

Solution a:

Shipway Company
Journal Entries - Direct Write-off method
Date	Particulars	Debit	Credit
13-Apr	Bad Debt Expense Dr	$3,370
	To Accounts Receivable-Dean		$3,370
15-May	Cash Dr	$1,690
	Bad Debt Expense Dr	$2,790
	To Accounts Receivable-Dan Pyle		$4,480
27-May	Accounts Receivable-Dean Dr	$3,370
(Reinstate)	To Bad debt expense		$3,370
27-May	Cash Dr	$3,370
(Collection)	To Accounts Receivable-Dean		$3,370
	(To record Cash received in full payment)
31-Dec	Bad Debt Expense Dr	$6,890
	To Accounts Receivable-Paul		$2,260
	To Accounts Receivable-Duana		$1,690
	To Accounts Receivable-Teresa		$1,010
	To Accounts Receivable-Ernie		$1,420
	To Accounts Receivable-Marty		$510
31-Dec	No entry.

Solution b:

Shipway Company
Journal Entries - Allowance method
Date	Particulars	Debit	Credit
13-Apr	Allowance for Doubtful Account Dr	$3,370
	To Accounts Receivable-Dean		$3,370
15-May	Cash Dr	$1,690
	Allowance for Doubtful Account Dr	$2,790
	To Accounts Receivable-Dan Pyle		$4,480
27-May	Accounts Receivable-Dean Dr	$3,370
(Reinstate)	To Allowance for Doubtful Account		$3,370
27-May	Cash Dr	$3,370
(Collection)	To Accounts Receivable-Dean		$3,370
	(To record Cash received in full payment)
31-Dec	Allowance for Doubtful Account Dr	$6,890
	To Accounts Receivable-Paul		$2,260
	To Accounts Receivable-Duana		$1,690
	To Accounts Receivable-Teresa		$1,010
	To Accounts Receivable-Ernie		$1,420
	To Accounts Receivable-Marty		$510
31-Dec	Bad debt Expense Dr ($548500*3%)	$16,455
	To Allowance for Doubtful Account		$16,455

Solution c:

Bad debt expense under allowance method = $16,455

Bad debt expense under Direct write off method = $3370 + 2790- 3370 +6890 = $9,680

Difference = $16455 - $9680 = $6,775

Hence income would be higher by $6,775 under the direct write-off method than under the allowance method.