Question

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, $5,190.
May 15	Received $2,600 as partial payment on the $6,900 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July 27	Received $5,190 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 $3,480 Duane DeRosa 2,600 Teresa Galloway 1,560 Ernie Klatt 2,180 Marty Richey 780
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 $1,266,500 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

Feedback

Remember that under the direct write-off method, Bad Debt Expense is not recorded until the customer's account is determined to be worthless.

Under the allowance method once a customer account is identified as uncollectible, it is written off against the allowance account.

Learning Objective 5.

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

Answer 1

Question a: Journal entries under write off method

Date	General Journal	Debit	Credit
April/13	Bad debt expenses a/c To Accounts receivble a/c -Dean sheppard (Being bad debts expensed)	$5,190	$5,190
May 15	Cash a/c Bad debt expenses a/c To Accounts recivable a/c - Dan Pyle (Being amount cash received and bad debt recognised)	$2,600 $4,300	$6,900
July 27	Accounts Receivable-Dean Sheppard To Bad Debt Expense (Being account which was wrote off is reinstated)	$5,190	$5,190
July 27	Cash a/c To Accounts Receivable-Dean Sheppard (Being cash received from dean sheppard)	$5,190	. $5,190
Dec 31	Bad debt expense a/c To Accounts Receivable-Paul Chapman a/c To Accounts Receivable-Duane DeRosa a/c To Accounts Receivable-Teresa Galloway a/c To Accounts Receivable-Ernie Klatt a/c To Accounts Receivable-Marty Richey a/c (Being bad debts expensed)	$10,600.	$3,480 $2,600 $1,560 $2,180 $780
Dec 31	No entry

Question b: Journal entries under allowance method

Date	General Journal	Debit	Credit
.Apr 13	Allowance for Doubtful Accounts To Accounts Receivable-Dean Sheppard (Being bad debts recognised)	$5,190	$5,190
May 15	Cash a/c Allowance for Doubtful Accounts a/c To Accounts Receivable-Dan Pyle a/c (Being amount cash received and bad debt recognised)	$2,600 $4,300	$6,900
July 27	Accounts Receivable-Dean Sheppard a/c To Allowance for Doubtful Accounts a/c (Being account which was wrote off is reinstated)	$5,190	$5,190
July 27	Cash a/c To Accounts Receivable-Dean Sheppard a/c (Being cash received from dean sheppard)	$5,190	$5,190
Dec 31	Allowance for Doubtful Accounts To Accounts Receivable-Paul Chapman a/c To Accounts Receivable-Duane DeRosa a/c To Accounts Receivable-Teresa Galloway a/c To Accounts Receivable-Ernie Klatt a/c To Accounts Receivable-Marty Richey a/c (Being bad debts expensed)	$10,600	$3,480 $2,600 $1,560 $2,180 $780
Dec 31	Bad debt expense a/c To Allowance for Doubtful Accounts (Being Bad debt recognised for the current year under allowance method) [$1,266,500 x 2%]	$25,330	$25,330

Question c

calculating that how much higher (lower) would Shipway Company's net income have been under the direct write-off method than under the allowance method:

a. Total bad debts under Write off method = $14,900

b. Total bad debts under Allowance method = $25,330

c. Difference (a - b) = ($10,430)

Here, bad debts recognised under write off method is lower than the bad debt recognised under allowance method. Therefore the company's net income under the direct method is higher than the net income under the allowance method by $10,430.