Question

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

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:

Customer		Amount
Kim Abel		$21,550
Lee Drake		33,925
Jenny Green		27,565
Mike Lamb		19,460
	Total	$102,500

The company prepared the following aging schedule for its accounts receivable on December 31:

Aging Class (Number of Days Past Due)	Receivables Balance on December 31			Estimated Percent of Uncollectible Accounts
0-30 days		$715,000		1%
31-60 days		310,000		2
61-90 days		102,000		15
91-120 days		76,000		30
More than 120 days		97,000		60
Total receivables		$1,300,000

a. Journalize the write-offs under the direct write-off method. If an amount box does not require an entry, leave it blank.

b. Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $95,000 on January 1 and the company uses the analysis of receivables method. For a compound transaction, if an amount box does not require an entry, leave it blank.

Write-off
Adjustment

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

Answer 1

Requirement a: [Direct write off]

Date	Account title and Explanation	Debit	Credit
Dec 31	Bad debt expense	$102,500
	Accounts receivable-Kim Abel		$21,550
	Accounts receivable-Lee Drake		$33,925
	Accounts receivable-Jenny Green		$27,565
	Accounts receivable-Mike Lamb		$19,460
	[To record written off of uncollectibles]

Requirement b: [Indirect method]

Date	Account title and Explanation	Debit	Credit
Dec 31	Allowance for doubtful accounts	$102,500
	Accounts receivable-Kim Abel		$21,550
	Accounts receivable-Lee Drake		$33,925
	Accounts receivable-Jenny Green		$27,565
	Accounts receivable-Mike Lamb		$19,460
	[To record written off of uncollectibles]
Dec 31	Bad debt expense	$117,150
	Allowance for doubtful accounts		$117,150
	[To record bad debt expense]

Calculations:

i. Allowance for doubtful accounts balance after adjustments:

	0-30	31-60	61-90	91-120	120+	Total
Accounts receivable	$715,000	$310,000	$102,000	$76,000	$97,000	$1,300,000
% of Uncollectibles	1%	2%	15%	30%	60%
Uncollectible expense	$7,150	$6,200	$15,300	$22,800	$58,200	$109,650

ii.Bad debt expense:

Allowance for doubtful accounts balance after adjustments [Cr.]	$109,650
Written off during the year	$102,500
Allowance for doubtful accounts balance before adjustments [Cr.]	($95,000)
Bad debt expense	$117,150

Requirement c:

Answer: Lower of $14,650

Calculations:

Bad debt expense under allowance method	$117,150
(Less):Bad debt expense under Direct write off method	($102,500)
Net income lower under allowance method than direct write off	$14,650