Question

2. 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, $5,050.
   May 15.	Received $2,530 as partial payment on the $6,720 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
   July 27.	Received $5,050 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 $3,380 Duane DeRosa 2,530 Teresa Galloway 1,520 Ernie Klatt 2,120 Marty Richey 760
   Dec. 31	If necessary, record the year-end adjusting entry for 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

   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.

   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, 2% of credit sales are expected to be uncollectible. Shipway Company recorded $1,232,500 of credit sales during the year.

   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

   Partially correct

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

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   Compare the bad debt expense account balance for both methods.

   Feedback

   Partially correct

Answer 1

1)	Direct method
	Date	Account titles & Explanations				Debit	Credit
	13-Apr	Bad debts expense				5,050
		Account receivable-Dean					5,050
	15-May	Cash				2,530
		Bad debts expense				4,190
		Account receivable-Dan					6,720
	27-Jul	Accounts receivable-Dean				5,050
		Bad debts expense					5,050
		cash				5,050
		Account receivable-Dean					5,050
	31-Dec	Bad debts expense				10,310
		Accounts receivable-Paul Chapman					3,380
		Accounts receivable-Dauna DeRosa					2,530
		Accounts receivable-Teresa Galloway					1,520
		Accounts receivable-Ernie Klatt					2,120
		Accounts receivable-Marty Richey					760
	31-Dec	No Entry
	2)	Allowance method
	Date	Account titles & Explanations				Debit	Credit
	13-Apr	Allowance for Doubtful account				5,050
		Account receivable-Dean					5,050
	15-May	Cash				2,530
		Allowance for Doubtful account				4,190
		Account receivable-Dan					6,720
	27-Jul	Accounts receivable-Dean				5,050
		Allowance for Doubtful account					5,050
		cash				5,050
		Account receivable-Dean					5,050
	31-Dec	Allowance for doubtful account				10,310
		Accounts receivable-Paul Chapman					3,380
		Accounts receivable-Dauna DeRosa					2,530
		Accounts receivable-Teresa Galloway					1,520
		Accounts receivable-Ernie Klatt					2,120
		Accounts receivable-Marty Richey					760
	31-Dec	Bad debts expense				24650
		allowance for Doubtful accounts					24,650
		(1,232,500*2%)
	c)	Allowance for doubtful account-bad debts					24650
		Direct method -Bad debts					14,500
		Difference					10,150
		Hence income would be $10,150 higher under direct write off
		method than under the allowance method