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.