The following selected transactions were taken from the records of Shipway Compa

Question

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:

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.

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 $1,266,500 of credit sales during the year.

Journalize the transactions under the allowance method.

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?

Apr. 13 Wrote off account of Dean Sheppard, $5,190. May 15 Received $2,600 as partial payment on the $6,900 account of Dan Pyle. Wrote off the remaining balance as uncollectible. July 27 Received $5,190 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 $3,480 Duane DeRosa 2,600 Teresa Galloway 1,560 Ernie Klatt 2,180 Marty Richey 780 Dec. 31 If necessary, record the year-end adjusting entry for the uncollectible accounts.

Explanation / Answer

Question a: Journal entries under write off method

Bad debt expenses a/c

To Accounts receivble a/c -Dean sheppard

(Being bad debts expensed)

$5,190

$5,190

Cash a/c

Bad debt expenses a/c

To Accounts recivable a/c - Dan Pyle

(Being amount cash received and bad debt recognised)

$2,600

$4,300

$6,900

Accounts Receivable-Dean Sheppard

To Bad Debt Expense

(Being account which was wrote off is reinstated)

$5,190

$5,190

Cash a/c

To Accounts Receivable-Dean Sheppard

(Being cash received from dean sheppard)

$5,190

.

$5,190

Bad debt expense a/c

To Accounts Receivable-Paul Chapman a/c

To Accounts Receivable-Duane DeRosa a/c

To Accounts Receivable-Teresa Galloway a/c

To Accounts Receivable-Ernie Klatt a/c

To Accounts Receivable-Marty Richey a/c

(Being bad debts expensed)

$10,600.

$3,480

$2,600

$1,560

$2,180

$780

Question b: Journal entries under allowance method

Allowance for Doubtful Accounts

To Accounts Receivable-Dean Sheppard

(Being bad debts recognised)

$5,190

$5,190

Cash a/c

Allowance for Doubtful Accounts a/c

To Accounts Receivable-Dan Pyle a/c

(Being amount cash received and bad debt recognised)

$2,600

$4,300

$6,900

Accounts Receivable-Dean Sheppard a/c

To Allowance for Doubtful Accounts a/c

(Being account which was wrote off is reinstated)

$5,190

$5,190

Cash a/c

To Accounts Receivable-Dean Sheppard a/c

(Being cash received from dean sheppard)

$5,190

$5,190

Allowance for Doubtful Accounts

To Accounts Receivable-Paul Chapman a/c

To Accounts Receivable-Duane DeRosa a/c

To Accounts Receivable-Teresa Galloway a/c

To Accounts Receivable-Ernie Klatt a/c

To Accounts Receivable-Marty Richey a/c

(Being bad debts expensed)

$10,600

$3,480

$2,600

$1,560

$2,180

$780

Bad debt expense a/c

To Allowance for Doubtful Accounts

(Being Bad debt recognised for the current year under allowance method)

[$1,266,500 x 2%]

$25,330

$25,330

Question c

calculating that how much higher (lower) would Shipway Company's net income have been under the direct write-off method than under the allowance method:

a. Total bad debts under Write off method = $14,900

b. Total bad debts under Allowance method = $25,330

c. Difference (a - b) = ($10,430)

Here, bad debts recognised under write off method is lower than the bad debt recognised under allowance method. Therefore the company's net income under the direct method is higher than the net income under the allowance method by $10,430.

Date General Journal Debit Credit April/13

Bad debt expenses a/c

To Accounts receivble a/c -Dean sheppard

(Being bad debts expensed)

$5,190

$5,190

May 15

Cash a/c

Bad debt expenses a/c

To Accounts recivable a/c - Dan Pyle

(Being amount cash received and bad debt recognised)

$2,600

$4,300

$6,900

July 27

Accounts Receivable-Dean Sheppard

To Bad Debt Expense

(Being account which was wrote off is reinstated)

$5,190

$5,190

July 27

Cash a/c

To Accounts Receivable-Dean Sheppard

(Being cash received from dean sheppard)

$5,190

.

$5,190

Dec 31

Bad debt expense a/c

To Accounts Receivable-Paul Chapman a/c

To Accounts Receivable-Duane DeRosa a/c

To Accounts Receivable-Teresa Galloway a/c

To Accounts Receivable-Ernie Klatt a/c

To Accounts Receivable-Marty Richey a/c

(Being bad debts expensed)

$10,600.

$3,480

$2,600

$1,560

$2,180

$780

Dec 31 No entry

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