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, $8,030.
May	15.	Received $500 as partial payment on the $7,430 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July	27.	Received $8,030 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	$2,205
		Duane DeRosa	3,510
		Teresa Galloway	4,785
		Ernie Klatt	1,185
		Marty Richey	1,710
	31.	If necessary, record the year-end adjusting entry for uncollectible accounts.

Required:

A.	Journalize the transactions under the direct write-off method. If no entry is required, simply skip to the next transaction. Refer to the Chart of Accounts for exact wording of account titles.
B.	Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, 0.65% of credit sales are expected to be uncollectible. Shipway Company recorded $4,046,000 of credit sales during the year. If no entry is required, simply skip to the next transaction. Refer to the Chart of Accounts for exact wording of account titles.
C.	How much higher (lower) would Shipway Company’s net income have been under the direct write-off method than under the allowance method?

CHART OF ACCOUNTSShipway CompanyGeneral Ledger

	ASSETS
110	Cash
111	Petty Cash
121	Accounts Receivable-Paul Chapman
122	Accounts Receivable-Duane DeRosa
123	Accounts Receivable-Teresa Galloway
124	Accounts Receivable-Ernie Klatt
125	Accounts Receivable-Dan Pyle
126	Accounts Receivable-Marty Richey
127	Accounts Receivable-Dean Sheppard
129	Allowance for Doubtful Accounts
131	Interest Receivable
132	Notes Receivable
141	Merchandise Inventory
145	Office Supplies
146	Store Supplies
151	Prepaid Insurance
181	Land
191	Store Equipment
192	Accumulated Depreciation-Store Equipment
193	Office Equipment
194	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
211	Salaries Payable
213	Sales Tax Payable
214	Interest Payable
215	Notes Payable

	EQUITY
310	Owner, Capital
311	Owner, Drawing
312	Income Summary

	REVENUE
410	Sales
610	Interest Revenue

	EXPENSES
510	Cost of Merchandise Sold
520	Sales Salaries Expense
521	Advertising Expense
522	Depreciation Expense-Store Equipment
523	Delivery Expense
524	Repairs Expense
529	Selling Expenses
530	Office Salaries Expense
531	Rent Expense
532	Depreciation Expense-Office Equipment
533	Insurance Expense
534	Office Supplies Expense
535	Store Supplies Expense
536	Credit Card Expense
537	Cash Short and Over
538	Bad Debt Expense
539	Miscellaneous Expense
710	Interest Expense

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

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Answer 1

A.

B.

C.