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).