Question

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

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:

June 8.	Wrote off account of Kathy Quantel, $7,700.
Aug. 14.	Received $5,470 as partial payment on the $13,780 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible.
Oct. 16.	Received the $7,700 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt.
Dec. 31	Wrote off the following accounts as uncollectible (record as one journal entry):

Wade Dolan	$2,230
Greg Gagne	1,390
Amber Kisko	5,310
Shannon Poole	3,080
Niki Spence	850

Dec. 31   If necessary, record the year-end adjusting entry for uncollectible accounts.

Rustic Tables Company prepared the following aging schedule for its accounts receivable:

Aging Class (Number of Days Past Due)									Receivables Balance on December 31				Estimated Percent of Uncollectible Accounts
								0-30 days	$370,000				3%
								31-60 days	139,000				8
								61-90 days	44,000				20
								91-120 days	16,000				50
								More than 120 days	22,000				80
								Total receivables	$591,000

For those amount boxes in which no entry is required, leave the box blank. If an account is not required, select "No entry" from the dropdown box(es).

a. Journalize the transactions under the direct write-off method.

June 8.	Bad Debt Expense
	Accounts Receivable-Kathy Quantel
Aug. 14	Cash
	Bad Debt Expense
	Accounts Receivable-Rosalie Oakes
Oct.16-reinstate	Accounts Receivable-Kathy Quantel
	Bad Debt Expense
Oct.16-collection	Cash
	Accounts Receivable-Kathy Quantel
Dec. 31-write-off	No entry
	Accounts Receivable-Wade Dolan
	Accounts Receivable-Greg Gagne
	Accounts Receivable-Amber Kisko
	Accounts Receivable-Shannon Poole
	Accounts Receivable-Niki Spence
Dec. 31-adjusting	No entry

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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's account is identified as uncollectible, it is written off against the allowance account.

b. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $23,100 on January 1 and the company uses the analysis of receivables method.

June 8.	Allowance for Doubtful Accounts
	Accounts Receivable-Kathy Quantel
Aug. 14	Cash
	Allowance for Doubtful Accounts
	Accounts Receivable-Rosalie Oakes
Oct.16-reinstate	Accounts Receivable-Kathy Quantel
	Allowance for Doubtful Accounts
Oct.16-collection	Cash
	Accounts Receivable-Kathy Quantel
Dec. 31-write-off	Allowance for Doubtful Accounts
	Accounts Receivable-Wade Dolan
	Accounts Receivable-Greg Gagne
	Accounts Receivable-Amber Kisko
	Accounts Receivable-Shannon Poole
	Accounts Receivable-Niki Spence
Dec. 31-adjusting	Bad Debt Expense
	Allowance for Doubtful Accounts

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Partially correct

c. How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?
  by

Answer 1

a.

Date	Account Titles	Debit	Credit
June 8.	Bad Debt Expense	$             7,700
	Accounts Receivable-Kathy Quantel		$             7,700
Aug. 14	Cash	$             5,470
	Bad Debt Expense	$             8,310
	Accounts Receivable-Rosalie Oakes		$           13,780
Oct.16-reinstate	Accounts Receivable-Kathy Quantel	$             7,700
	Bad Debt Expense		$             7,700
Oct.16-collection	Cash	$             7,700
	Accounts Receivable-Kathy Quantel		$             7,700
Dec. 31-write-off	Bad Debt Expense	$           12,860
	Accounts Receivable-Wade Dolan		$             2,230
	Accounts Receivable-Greg Gagne		$             1,390
	Accounts Receivable-Amber Kisko		$             5,310
	Accounts Receivable-Shannon Poole		$             3,080
	Accounts Receivable-Niki Spence		$                 850
Dec. 31-adjusting	No entry

Bad Debt Expense = $7700+8310-7700+12860 = $21170

b.

Allowance for Doubtful Accounts Unadjusted balance = $23100-21170 = $1930

	Receivable	Uncollectible Percent	Allowance
0-30 days	$         370,000	3%	$            11,100
31-60 days	$         139,000	8%	$            11,120
61-90 days	$           44,000	20%	$              8,800
91-120 days	$           16,000	50%	$              8,000
More than 120 days	$           22,000	80%	$            17,600
Total	$         591,000		$            56,620

Date	Account Titles	Debit	Credit
June 8.	Allowance for Doubtful Accounts	$             7,700
	Accounts Receivable-Kathy Quantel		$             7,700
Aug. 14	Cash	$             5,470
	Allowance for Doubtful Accounts	$             8,310
	Accounts Receivable-Rosalie Oakes		$           13,780
Oct.16-reinstate	Accounts Receivable-Kathy Quantel	$             7,700
	Allowance for Doubtful Accounts		$             7,700
Oct.16-collection	Cash	$             7,700
	Accounts Receivable-Kathy Quantel		$             7,700
Dec. 31-write-off	Allowance for Doubtful Accounts	$           12,860
	Accounts Receivable-Wade Dolan		$             2,230
	Accounts Receivable-Greg Gagne		$             1,390
	Accounts Receivable-Amber Kisko		$             5,310
	Accounts Receivable-Shannon Poole		$             3,080
	Accounts Receivable-Niki Spence		$                 850
Dec. 31-adjusting	Bad Debt Expense	$           54,690
	Allowance for Doubtful Accounts		$           54,690

Bad Debt Expense = $56620-1930 = $54690

c.
Net Income higher in direct write off by $33520