EX 9-13 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, $8,450.

May 15. Received $500 as partial payment on the $7,100 account of Dan Pyle. Wrote off the remaining balance as uncollectible.

July 27. Received $8,450 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 $2,225

Duane DeRosa 3,550

Teresa Galloway 4,770

Ernie Klatt 1,275

Marty Richey 1,690

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

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

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, 3⁄4% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during the year.

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:

a.  Apr. 13 Bad Debt Expense8,450

Accounts Receivable—Dean Sheppard 8,450

 May 15 Cash500

Bad Debt Expense6,600

Accounts Receivable—Dan Pyle7,100

 July 27 Accounts Receivable—Dean Sheppard 8,450

Bad Debt Expense8,450

27 Cash8,450

Accounts Receivable—Dean Sheppard 8,450

 Dec. 31 Bad Debt Expense13,510

Accounts Receivable—Paul Chapman 2,225

Accounts Receivable—Duane DeRosa 3,550

Accounts Receivable—Teresa Galloway 4,770

Accounts Receivable—Ernie Klatt 1,275

Accounts Receivable—Marty Richey 1,690

31 No entry

b.  Apr. 13 Allowance for Doubtful Accounts 8,450

Accounts Receivable—Dean Sheppard 8,450

 May 15 Cash500

Allowance for Doubtful Accounts 6,600

Accounts Receivable—Dan Pyle7,100

 July 27 Accounts Receivable—Dean Sheppard 8,450

Allowance for Doubtful Accounts 8,450

27 Cash8,450

Accounts Receivable—Dean Sheppard 8,450

 Dec. 31 Allowance for Doubtful Accounts 13,510

Accounts Receivable—Paul Chapman 2,225

Accounts Receivable—Duane DeRosa 3,550

Accounts Receivable—Teresa Galloway 4,770

Accounts Receivable—Ernie Klatt 1,275

Accounts Receivable—Marty Richey 1,690

31 Bad Debt Expense28,335

Allowance for Doubtful Accounts 28,335

Uncollectible accounts estimate

($3,778,000 × 0.75% = $28,335).

c. Bad debt expense under:

Allowance method........................................................................ $28,335

Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)............... 20,110

Difference ($28,335 – $20,110)......................................................... $ 8,225

Shipway Company’s income would have been $8,225 higher under the direct 

write-off method than under the allowance method.