Question

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, $2,330.
May 15. Received $1,170 as partial payment on the $3,100 account of Dan Pyle.
Wrote off the remaining balance as uncollectible.
July 27. Received $2,330 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 $2,280
Duane DeRosa 3,535
Teresa Galloway 4,625
Ernie Klatt 1,095
Marty Richey 1,800
If necessary, record the year-end adjusting entry for uncollectible accounts.
Required:
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, 0.75% of credit sales are expected to be uncollectible. Shipway Company recorded $3,720,000 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 1

Shipway Company

A. Journal entries under the direct write-off method:

Apr. 13. Debit Bad Debts Expense $2,330

Credit Accounts receivable (Dean Sheppard) $2,330

To write-off an uncollectible account.

May 15. Debit Cash $1,170

Debit Bad Debts Expense $1,930

Credit Accounts receivable (Dan Pyle) $3,100

To record receipt of cash and write-off of the uncollectible balance.

July 27. Debit Accounts receivable $2,330

Credit Bad Debts Expense $2,330

To reverse the write-off on April 13.

Debit Cash $2,330

Credit Accounts receivable (Dean Sheppard) $2,330

To record the receipt of a previously written-off uncollectible.

Dec. 31 Debit Bad Debts Expense $13,335

Credit Accounts receivable $13,335

To write-off some uncollectible accounts.

B. Journal entries under the allowance method:

Apr. 13. Debit Allowance for Uncollectible Accounts $2,330

Credit Accounts receivable (Dean Sheppard) $2,330

To write an uncollectible account.

May 15. Debit Cash $1,170

Debit Allowance for Uncollectible Accounts $1,930

Credit Accounts receivable (Dan Pyle) $3,100

To record the receipt of cash and write-off the uncollectible portion.

July 27. Debit Accounts receivable $2,330

Credit Allowance for Uncollectible Accounts $2,330

To reverse a previously written-off account.

Debit Cash $2,330

Credit Accounts receivable (Dean Sheppard) $2,330

To record the receipt of a previously written-off account.

Dec. 31 Debit Allowance for Uncollectible Accounts $13,335

Credit Accounts receivable $13,335

To write-off some uncollectible accounts.

C. Shipway Company's net income would have been higher by $27,900 under the direct write-off method than under the allowance method.

Step-by-step explanation:

a) Data and Transaction Analysis:

Direct write-off method:

Apr. 13. Bad Debts Expense $2,330 Accounts receivable (Dean Sheppard) $2,330.

May 15. Cash $1,170 Bad Debts Expense $1,930 Accounts receivable (Dan Pyle) $3,100

July 27. Cash $2,330 Accounts receivable (Dean Sheppard)

Accounts receivable $2,330 Bad Debts Expense $2,330

Dec. 31 Bad Debts Expense $13,335 Accounts receivable $13,335

Total bad debts expense = $15,265

The uncollectible accounts:

Paul Chapman $2,280

Duane DeRosa 3,535

Teresa Galloway 4,625

Ernie Klatt 1,095

Marty Richey 1,800

Total amount = $13,335

Allowance Method:

Apr. 13. Allowance for Uncollectible Accounts $2,330 Accounts receivable (Dean Sheppard) $2,330.

May 15. Cash $1,170 Allowance for Uncollectible Accounts $1,930 Accounts receivable (Dan Pyle) $3,100

July 27. Cash $2,330 Accounts receivable (Dean Sheppard)

Accounts receivable $2,330 Allowance for Uncollectible Accounts $2,330

Dec. 31 Allowance for Uncollectible Accounts $13,335 Accounts receivable $13,335

Ending balance of Allowance for Uncollectible Accounts $27,900

Credit Sales during the year = $3,720,000

Expected Uncollectible = 0.75% of $3,720,000 = $27,900

Allowance for Uncollectible Accounts

Date Account Titles Debit Credit

Apr. 13. Accounts receivable

(Dean Sheppard) $2,330

May 15. Accounts receivable (Dan Pyle) 1,930

July 27. Accounts receivable $2,330

Dec. 31 Accounts receivable 13,335

Dec. 31 Ending balance 27,900

Dec. 31 Bad Debts Expense 43,165

Total $45,495 $45,495

Difference between the direct write-off method and the allowance method = expenses higher by $27,900 under the allowance method.

Total bad debts expense under allowance = $43,165

Total bad debts expense under direct write-off $15,265

Difference = $27,900