Question

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, $5,190. 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.

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.

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

• All working forms part of the answer
• Working for Requirement ‘a’

Working #1
Bad Debt Expense
Apr-13	$                               5,190.00
May-15	$                               4,300.00
Jul-27	$                             (5,190.00)
Dec-31	$                             10,600.00
Total [Ending]	$                             14,900.00

• Working for Requirement ‘b’

Working #2: Allowance method
A	Credit Sale	$                       1,266,500.00
B = A x 2%	Bad Debt Expense	$                             25,330.00

• Requirement ‘a’ and ‘b’ journal entries, side by side for understanding and differentiation:

Date	Direct Write off Method			Allowance Method
	Accounts title	Debit	Credit	Accounts title	Debit	Credit
Apr-13	Bad Debt Expense	$                               5,190.00		Allowance for Uncollectible accounts	$                          5,190.00
	Accounts receivables		$                 5,190.00	Accounts receivables		$          5,190.00
May-15	Cash	$                               2,600.00		Cash	$                          2,600.00
	Bad Debt Expense	$                               4,300.00		Allowance for Uncollectible accounts	$                          4,300.00
	Accounts receivables		$                 6,900.00	Accounts receivables		$          6,900.00
Jul-27	Accounts receivables	$                               5,190.00		Accounts receivables	$                          5,190.00
[Re instated]	Bad Debt Expense		$                 5,190.00	Allowance for Uncollectible accounts		$          5,190.00
Jul-27	Cash	$                               5,190.00		Cash	$                          5,190.00
[Cash received]	Accounts receivables		$                 5,190.00	Accounts receivables		$          5,190.00
Dec-31	Bad Debt Expense	$                             10,600.00		Allowance for Uncollectible accounts	$                        10,600.00
	Accounts receivables		$               10,600.00	Accounts receivables		$        10,600.00
Dec-31	NO ENTRY			Bad Debt Expense [Working #2]	$                        25,330.00
[adjustment entry]				Allowance for Uncollectible accounts		$        25,330.00

• Requirement ‘c’

Bad Debt Expense as per:
Direct Write off Method	$                        14,900.00
Allowance Method	$                        25,330.00
Difference	$                        10,430.00

---Hence, if Direct Write off method have been used, the Net Income would be higher by $ 10,430 than Net Income computed if Allowance method had been used.