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).