EX 8-13 Entries for bad debt expense under the direct write-off and allowance Ob
ID: 2569956 • Letter: E
Question
EX 8-13 Entries for bad debt expense under the direct write-off and allowance Obj. 5 methods The following selected transactions were taken from the records of Shipway Company for the r 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 July 27. Received $8,450 from Dean Sheppard, whose account had been written off on April 13. Reinstated the Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry): uncollectible. account and recorded the cash receipt. Paul Chapman Duane DeRosa Teresa Galloway Ernie Klatt Marty Richey $2,225 3,550 4,770 1,275 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, ¾% of credit sales are expected to be uncollectible. Shipway 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?Explanation / Answer
A.
Receivables include all money claims against other entities, including people, companies and other organizations. Account Receivable is created when merchandise is sold on credit. They are classified as current assets on the balance sheet.
When customers do not pay the account receivables then the receivables are classified as uncollectible. Two methods of accounting for uncollectible receivables are as follows:
1. Direct Write-off method: Records bad debts expense only when an account is determined to be worthless.
2. Allowance Method: Records Bad debts expense by estimating uncollectible accounts at the end of the accounting period.
Journal Entries for the first year of operations ending December 31 under the direct write-off method are illustrated below:
No adjustment entry is passed at year end under the direct method. So No Entry
B. Journal Entries for the first year of operations ending December 31 under the allowance method are illustrated below:
Bad-Debt expense is estimated at ¾ percent of credit sales.
The amount of adjusting entry is the Bad Debt expense for the current year which is transferred to Allowance for doubtful account.
Bad debt Expense is estimated as under:
The amount of the adjusting entry for uncollectible accounts is $28,335 which is journalized as under:
C.
Shipway Company net income would be $ 8,225 higher in direct method as bad debt expense is higher in allowance method than the direct method.
General Journal Year Particulars L.F Debit ($) Credit ($) 20XX May-15 Cash 500 Bad Debt Expense 6,600 Accounts Receivable-DP 7,100 (For Cash of $500 received and remaining amount written off) General Journal Year Particulars L.F Debit ($) Credit ($) 20XX Jul-27 Accounts Receivable-DP 8,450 Bad Debt Expense 8,450 (For Bad debts expense reversed) Jul-27 Cash 8,450 Accounts Receivable-DP 8,450 (For cash of $8,450 received from DP) General Journal Year Particulars L.F Debit ($) Credit ($) 20XX Dec-31 Bad Debt Expense 13,510 Accounts Receivable-PC 2,225 Accounts Receivable-DD 3,550 Accounts Receivable-TG 4,770 Accounts Receivable-EK 1,275 Accounts Receivable-MR 1,690 (For uncollectible amount written off under direct method)Related Questions
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