Question

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:

Customer Kim Abel Lee Drake Jenny Green Mike Lamb Total Amount $ 24,300 31,195 29,715 17,890 $103,100

The company prepared the following aging schedule for its accounts receivable on December 31:

1. Journalize the write-offs under the direct write-off method.

2. Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning balance of $89,000 and the company uses the analysis of receivables method.

3. How much higher (lower) would Seaforth International’s net income have been under the allowance method than under the direct write-off method?

Answer 1

Direct write off method:

Date	Account title and explanation	Debit	Credit
Dec 31	Bad debt expense	$103,100
	Accounts receivable-Kim Abel		$24,300
	Accounts receivable-Lee Drake		$31,195
	Accounts receivable-Jenny Green		$29,715
	Accounts receivable-Mike Lamb		$17,890
	[To record write off of uncollectibles]

Allowance method:

Date	Account title and explanation	Debit	Credit
Dec 31	Allowance for doubtful accounts	$103,100
	Accounts receivable-Kim Abel		$24,300
	Accounts receivable-Lee Drake		$31,195
	Accounts receivable-Jenny Green		$29,715
	Accounts receivable-Mike Lamb		$17,890
	[To record write off of uncollectibles]
Dec 31	Bad debt expense [107,200+103,100-89,000]	$121,300
	Allowance for doubtful accounts		$121,300
	[To record adjusting entry for bad debt expense]

higher (lower) of net income under the allowance method than under the direct write-off method:

Net income is lower under the allowance method because bad debt expense is higher.

Lower amount is $18,200 (121,300-103,100)