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, $2,960.
May 15	Received $1,480 as partial payment on the $3,940 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July 27	Received $2,960 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 $1,980 Duane DeRosa 1,480 Teresa Galloway 890 Ernie Klatt 1,240 Marty Richey 440
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	Bad Debt Expense
	Accounts Receivable-Dean Sheppard
May 15	Cash
	Bad Debt Expense
	Accounts Receivable-Dan Pyle
July 27-reinstate	Accounts Receivable-Dean Sheppard
	Bad Debt Expense
July 27-collection	Cash
	Accounts Receivable-Dean Sheppard
Dec. 31-write-off	Bad Debt Expense
	Accounts Receivable-Paul Chapman
	Accounts Receivable-Duane DeRosa
	Accounts Receivable-Teresa Galloway
	Accounts Receivable-Ernie Klatt
	Accounts Receivable-Marty Richey
Dec. 31-adjusting	No entry
	No entry

b. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, 2% of credit sales are expected to be uncollectible. Shipway Company recorded $721,700 of credit sales during the year.

Journalize the transactions under the allowance method.

Apr. 13	Allowance for Doubtful Accounts
	Accounts Receivable-Dean Sheppard
May 15	Cash
	Allowance for Doubtful Accounts
	Accounts Receivable-Dan Pyle
July 27-reinstate	Accounts Receivable-Dean Sheppard
	Allowance for Doubtful Accounts
July 27-collection	Cash
	Accounts Receivable-Dean Sheppard
Dec. 31-write-off	Allowance for Doubtful Accounts
	Accounts Receivable-Paul Chapman
	Accounts Receivable-Duane DeRosa
	Accounts Receivable-Teresa Galloway
	Accounts Receivable-Ernie Klatt
	Accounts Receivable-Marty Richey
Dec. 31-adjusting	Bad Debt Expense
	Allowance for Doubtful Accounts

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

1. Direct write off method

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
April 13	Bad Debt Expense	2,960
	Accounts Receivable-Dean Sheppard		2,960
May 15	Cash	1,480
	Bad Debt Expense	2,460
	Accounts Receivable-Dan Pyle		3,940
July 27	Accounts Receivable-Dean Sheppard	2,960
	Bad Debt Expense		2,960
	Cash	2,960
	Accounts Receivable-Dean Sheppard		2,960
Dec.31	Bad Debt Expense	6,030
	Accounts Receivable-Paul Chapman		1,980
	Accounts Receivable-Duane DeRosa		1,480
	Accounts Receivable-Teresa Galloway		890
	Accounts Receivable-Ernie Klatt		1,240
	Accounts Receivable-Marty Richey		440
Dec.31	No entry

2. Allowance method

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
April 13	Allowance for Doubtful Accounts	2,960
	Accounts Receivable-Dean Sheppard		2,960
May 15	Cash	1,480
	Allowance for Doubtful Accounts	2,460
	Accounts Receivable-Dan Pyle		3,940
July 27	Accounts Receivable-Dean Sheppard	2,960
	Allowance for Doubtful Accounts		2,960
	Cash	2,960
	Accounts Receivable-Dean Sheppard		2,960
Dec.31	Allowance for Doubtful Accounts	6,030
	Accounts Receivable-Paul Chapman		1,980
	Accounts Receivable-Duane DeRosa		1,480
	Accounts Receivable-Teresa Galloway		890
	Accounts Receivable-Ernie Klatt		1,240
	Accounts Receivable-Marty Richey		440
Dec. 31-adjusting	Bad Debt Expense (721,700*2%)	14,434
	Allowance for Doubtful Accounts		14,434

3. Expense under the allowance method = 14,434

Expense under the direct write off method = 2,960+2,460-2,960+6,030 = 8,490

Hence, net income under direct write off methodis higher by $5,944(14,434-8,490)