Question

1.

Jan.	19	Sold merchandise on account to Dr. Kyle Norby, $16,590. The cost of the goods sold was $9,660.
June	2	Received $4,010 from Dr. Kyle Norby and wrote off the remainder owed on the sale of January 19 as uncollectible.
Oct.	23	Reinstated the account of Dr. Kyle Norby that had been written off on June 2 and received $12,580 cash in full payment.

Journalize the above transactions in the accounts of Canyon River Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables. Refer to the Chart of Accounts for exact wording of account titles.

2.

Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Method

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:

June 8.	Wrote off account of Kathy Quantel, $5,770.
Aug. 14.	Received $4,100 as partial payment on the $10,330 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible.
Oct. 16.	Received the $5,770 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt.
Dec. 31.	Wrote off the following accounts as uncollectible (record as one journal entry):
	Wade Dolan $1,670 Greg Gagne 1,040 Amber Kisko 3,980 Shannon Poole 2,310 Niki Spence 630
Dec. 31.	If necessary, record the year-end adjusting entry for uncollectible accounts.

If no entry is required, select "No entry" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank.

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

June 8
Aug. 14
Oct. 16
Oct. 16
Dec. 31
Dec. 31

b. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning balance of $17,310 at the beginning of the year and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:

Aging Class (Number of Days Past Due)									Receivables Balance on December 31				Estimated Percent of Uncollectible Accounts
								0-30 days	$277,000				2	%
								31-60 days	104,000				9
								61-90 days	33,000				20
								91-120 days	12,000				55
								More than 120 days	17,000				80
								Total receivables	$443,000

June 8
Aug. 14
Oct. 16
Oct. 16
Dec. 31
Dec. 31

c. How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?
  by

Answer 1

1) The required journal entries for the given transactions are shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Jan. 19	Accounts receivable-Dr. Kyle Norby	16,590
	Sales revenue		16,590
	(To record the credit sales)
	Cost of goods sold	9,660
	Merchandise Inventory		9,660
	(To record the cost of goods sold)
June 2	Cash	4,010
	Bad Debt Expense (16,590-4,010)	12,580
	Accounts receivable-Dr. Kyle Norby		16,590
	(To record the bad debt expense)
Oct 23	Accounts receivable-Dr. Kyle Norby	12,580
	Bad Debt Expense		12,580
	(To reinstate the account of Dr. Kyle Norby)
Oct 23	Cash	12,580
	Accounts receivable-Dr. Kyle Norby		12,580
	(To record the cash received)

2) a) Journal Entries under Direct Write Off Method (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
June 8	Bad Debt Expense	5,770
	Accounts Receivable-Kathy Quantel		5,770
	(To record the accounts write off)
Aug 14	Cash	4,100
	Bad Debt Expense (10,330-4,100)	6,230
	Accounts Receivable-Rosalie Oakes		10,330
	(To record the cash received and remaining account written off)
Oct 16	Accounts Receivable-Kathy Quantel	5,770
	Bad Debt Expense		5,770
	(To reinstate the account written off)
Oct 16	Cash	5,770
	Accounts Receivable-Kathy Quantel		5,770
	(To record the bad debt recovered)
Dec. 31	Bad Debt Expense (1,670+1,040+3,980+2,310+630)	9,630
	Accounts Receivable-Wade Dolan		1,670
	Accounts Receivable-Greg Gagne		1,040
	Accounts Receivable-Amber Kisko		3,980
	Accounts Receivable-Shannon Poole		2,310
	Accounts Receivable-Niki Spence		630
	(To record the uncollectible write off)
Dec 31	No Entry required

2) b) Firstly we need to calculate the required ending balance of allowances for uncollectible accounts which is calculated as follows:-

Aging Class (Number of Days Past Due)	Receivables Balance on December 31 (A)	Estimated Percent of Uncollectible Accounts (B)	Estimated Uncollectible Accounts (A*B)
0-30 days	277,000	2%	5,540
31-60 days	104,000	9%	9,360
61-90 days	33,000	20%	6,600
91-120 days	12,000	55%	6,600
More than 120 days	17,000	80%	13,600
Total	443,000		41,700

Journal Entries under Allowance Method (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
June 8	Allowance for Uncollectible Accounts	5,770
	Accounts Receivable-Kathy Quantel		5,770
	(To record the accounts write off)
Aug 14	Cash	4,100
	Allowance for Uncollectible Accounts (10,330-4,100)	6,230
	Accounts Receivable-Rosalie Oakes		10,330
	(To record the cash received and remaining account written off)
Oct 16	Accounts Receivable-Kathy Quantel	5,770
	Allowance for Uncollectible Accounts		5,770
	(To reinstate the account written off)
Oct 16	Cash	5,770
	Accounts Receivable-Kathy Quantel		5,770
	(To record the bad debt recovered)
Dec. 31	Allowance for Uncollectible Accounts (1,670+1,040+3,980+2,310+630)	9,630
	Accounts Receivable-Wade Dolan		1,670
	Accounts Receivable-Greg Gagne		1,040
	Accounts Receivable-Amber Kisko		3,980
	Accounts Receivable-Shannon Poole		2,310
	Accounts Receivable-Niki Spence		630
	(To record the uncollectible write off)
Dec 31	Bad Debt Expense	40,250
	Allowance for Uncollectible Accounts		40,250
	(To record the adjusting Entry)

Balance of Allowance for Uncollectibles = Beg Balance-Accounts Written off+Accounts Reinstated

= $17,310-(5,770+6,230+9,630)+5,770 = $1,450

Required Ending Balance for Allowance = $41,700

Adjusting Entry required = $41,700 - $1,450 = $40,250

2) c) Bad debt expense under direct write off method = 5,770+6,230-5,770+9,630 = $15,860

Bad debt expense under allowance method = $40,250

Net income will be higher under direct write off method = $40,250-$15,860 = $24,390

Therefore Rustic Tables’ net income have been higher under the direct write-off method than under the allowance method by $24,390.