Entries for Bad Debt Expense under the Direct Write-Off and Allowance Methods

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, $7,390.

May 15 Received $3,700 as partial payment on the $9,830 account of Dan Pyle. Wrote off the remaining balance as uncollectible.

July 27 Received $7,390 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 $4,950

Duane DeRosa 3,700

Teresa Galloway 2,220

Ernie Klatt 3,100

Marty Richey 1,110

Dec. 31 If necessary, record the year-end adjusting entry for the uncollectible accounts.

For those amount boxes in which no entry is required, leave the box blank. If an entry is not required, select "No entry" from the dropdown box(es).

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

Apr. 13

Bad Debt Expense

7,390

Accounts Receivable-Dean Sheppard

7,390

May 15

Cash

3,700

Bad Debt Expense

Accounts Receivable-Dan Pyle

6,130

6,130

July 27-reinstate

Accounts Receivable-Dean Sheppard

Bad Debt Expense

July 27-collection

Cash

Accounts Receivable-Dean Sheppard

Dec. 31-write-off

Bad Debt Expense

Accounts Receivable-Paul Chapman

Accounts Receivable-Duane DeRosa

Accounts Receivable-Teresa Galloway

Accounts Receivable-Ernie Klatt

Accounts Receivable-Marty Richey

Dec. 31-adjusting

No entry

No entry

Feedback

Remember that under the direct write-off method, Bad Debt Expense is not recorded until the customer's account is determined to be worthless.

Under the allowance method once a customer account is identified as uncollectible, it is written off against the allowance account.

Learning Objective 5.

b. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, 2% of credit sales are expected to be uncollectible. Shipway Company recorded $1,802,900 of credit sales during the year.

Journalize the transactions under the allowance method.

Apr. 13

Allowance for Doubtful Accounts

Accounts Receivable-Dean Sheppard

May 15

Cash

Allowance for Doubtful Accounts

Accounts Receivable-Dan Pyle

July 27-reinstate

Accounts Receivable-Dean Sheppard

Allowance for Doubtful Accounts

July 27-collection

Cash

Accounts Receivable-Dean Sheppard

Dec. 31-write-off

Allowance for Doubtful Accounts

Accounts Receivable-Paul Chapman

Accounts Receivable-Duane DeRosa

Accounts Receivable-Teresa Galloway

Accounts Receivable-Ernie Klatt

Accounts Receivable-Marty Richey

Dec. 31-adjusting

Bad Debt Expense

Allowance for Doubtful Accounts

Feedback

Remember that under the direct write-off method, Bad Debt Expense is not recorded until the customer's account is determined to be worthless.

Under the allowance method once a customer account is identified as uncollectible, it is written off against the allowance account.

Learning Objective 5.

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

Higher

by $