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

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

Customer       Amount

Kim Abel     $ 21,550

Lee Drake      33,925

Jenny Green    27,565

Mike Lamb      19,460

Total        $102,500

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 $ 715,000 1% 31–60 days 310,000 2 61–90 days 102,000 15 91–120 days 76,000 30 More than 120 days 97,000 60 Total receivables $1,300,000

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

b. Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $95,000 on January 1 and the company uses the analysis of receivables method.

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:

a. Bad Debt Expense102,500

Accounts Receivable—Kim Abel21,550

Accounts Receivable—Lee Drake33,925

Accounts Receivable—Jenny Green27,565

Accounts Receivable—Mike Lamb19,460

b. Allowance for Doubtful Accounts 102,500

Accounts Receivable—Kim Abel21,550

Accounts Receivable—Lee Drake33,925

Accounts Receivable—Jenny Green27,565

Accounts Receivable—Mike Lamb19,460

Bad Debt Expense117,150

Allowance for Doubtful Accounts117,150

Uncollectible accounts estimate

($109,650 + $7,500).

Computations:

Percent Amount

 0–30 days1% $ 7,150

 31–60 days2% 6,200

 61–90 days15% 15,300

 91–120 days30% 22,800

 More than 120 days60% 58,200

Total receivables$109,650

Unadjusted debit balance of Allowance for Doubtful Accounts

($102,500 – $95,000).............................................................................. $ 7,500

Estimated balance of Allowance for Doubtful Accounts

from aging schedule.............................................................................. 109,650

Adjustment............................................................................................. $117,150

c. Net income would have been $14,650 lower under the allowance method because

bad debt expense would have been $14,650 higher under the allowance method

($117,150 expense under the allowance method versus $102,500 expense under

the direct write-off method).