Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:

Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:

Customer          Amount

Shawn Brooke     $ 4,650

Eve Denton         5,180

Art Malloy        11,050

Cassie Yost        9,120

Total            $30,000

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

b. Journalize the write-offs under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded $5,250,000 of credit sales during the year. Based on past history and industry averages, 3⁄4% of credit sales are expected to be uncollectible.

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

Answer:

a. Bad Debt Expense30,000

Accounts Receivable—Shawn Brooke4,650

Accounts Receivable—Eve Denton5,180

Accounts Receivable—Art Malloy11,050

Accounts Receivable—Cassie Yost9,120

b. Allowance for Doubtful Accounts 30,000

Accounts Receivable—Shawn Brooke4,650

Accounts Receivable—Eve Denton5,180

Accounts Receivable—Art Malloy11,050

Accounts Receivable—Cassie Yost9,120

Bad Debt Expense39,375

Allowance for Doubtful Accounts39,375

Uncollectible accounts estimate

($5,250,000 × 0.75% = $39,375).

c. Net income would have been $9,375 higher under the direct write-off method

because bad debt expense would have been $9,375 lower under the direct

method ($39,375 expense under the allowance method versus $30,000 expense 

under the direct write-off method).