E8-17 (Supplement BA) Recording Write-Offs and Reporting Accounts Receivable Usi

Question

E8-17 (Supplement BA) Recording Write-Offs and Reporting Accounts Receivable Using the Direct Write-Off Method Electronics is a small company privately owned by Jon Trevorson Trevorson, an electrician who installs wiring in new homes. Because the company's financial statements are prepared only for tax purposes, Jon uses the direct write-off method. During 2015, its first year of operations, Trevorson Electronics sold $30,000 of services on account. The company collected $26,000 of these receivables during the year, and Jon believed that the remaining $4,000 was fully collectible. In 2016, Jon discovered that none of the $4,000 would be collected, so he wrote off the entire amount. To make matters worse, Jon sold only $5,000 of services during the year Required: 1. Prepare journal entries to record the transactions in 2015 and 2016. 2. Using only the information provided (ignore other operating expenses), prepare comparative income statements for 2015 and 2016. Was 2015 really as profitable as indicated by its income statement? Was 2016 quite as bad as indicated by its income statement? What should Jon do if he wants better information for assessing his company's ability to generate profit? COACHED PROBLEMS

Explanation / Answer

From the working, it can be inferred that 2015 was a profitable year for the company.

No. The Bad Debts Expenses are related to 2015 and must be recognized or deducted in 2015.

Answer 1. Journal Entry Date Particulars Debit$ Credit$ 2015 1 Accounts Receivable                           Dr. $        30,000 To Service Revenue $        30,000 2 Cash                                                            Dr. $        26,000    To Accounts Receivable $        26,000 2016 3 Bad Debt Expenses                              Dr. $          4,000    To Accounts Receivable $          4,000 4 Accounts Receivable                           Dr. $          5,000 To Service Revenue $          5,000 Answer 2. Trevorson Electronics Income Statement For the Years Ended Dec 31 2016 2015 Service Revenue $          5,000 $        30,000 Less: Operating Expenses Bad Debt Expenses $          4,000 $                 -   Net Operating Income $          1,000 $        30,000

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