Question

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

Customer	Amount
Kim Abel	$24,400
Lee Drake	30,700
Jenny Green	29,800
Mike Lamb	17,800
Total	$102,700

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	$735,000	1%
31–60 days	290,000	2
61–90 days	115,000	15
91–120 days	70,000	30
More than 120 days	92,000	60
Total receivables	$1,302,000

A.	Journalize the write-offs 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 write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning balance of $88,600 and the company uses the analysis of receivables method. 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 Seaforth International’s net income have been under the allowance method than under the direct write-off method?

Answer 1

(a)
Account Titles and Explanation	Debit (in $ )	Credit (in $ )
Bad Debt expense   - Balancing Fig.	$ 102,700
Accounts Receivable-Kim Abel		$ 24,400
Accounts Receivable-Lee Drake		$ 30,700
Accounts Receivable-Jenny Green		$ 29,800
Accounts Receivable-Mike Lamb		$ 17,800
(To record the Write-offs under direct method )
(b)
Account Titles and Explanation	Debit (in $ )	Credit (in $ )
Allowance for Doubtful accounts - Balancing Fig.	$ 102,700
Accounts Receivable-Kim Abel		$ 24,400
Accounts Receivable-Lee Drake		$ 30,700
Accounts Receivable-Jenny Green		$ 29,800
Accounts Receivable-Mike Lamb		$ 17,800
(To record the Write-offs under allowance method )
Account Titles and Explanation	Debit (in $ )	Credit (in $ )
Bad debt expense ( $ 106,600 + $ 102,700 (-) $ 88,600 )	$ 120,700
Allowance for Doubtful accounts		$ 120,700
(To record the Bad debt expense )
(c )
Net income Lower by $ 18,000
( $ 102,700 (-) $ 120,700 )
Aging Class	Receivables Balance	Estimated Percent Uncollectible	=	Uncollectible Amounts
0-30 days	7,35,000	1%	=	7350
31-60 days	2,90,000	2%	=	5800
61-90 days	1,15,000	15%	=	17250
91-120 days	70,000	30%	=	21000
More than 120 days	92,000	60%	=	55200
Total	13,02,000			106600