Question

Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Methods Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31: Customer Amount Kim Abel $24,300 Lee Drake 31,195 Jenny Green 29,715 Mike Lamb 17,890 Total $103,100 The company prepared the following aging schedule for its accounts receivable on December 31: Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Percent of Uncollectible Accounts 0-30 days $735,000 1 % 31-60 days 290,000 2 61-90 days 111,000 15 91-120 days 70,000 30 More than 120 days 94,000 60 Total receivables $1,300,000 a. Journalize the write-offs under the direct write-off method. If an amount box does not require an entry, leave it blank. Bad Debt Expense Accounts Receivable-Kim Abel Accounts Receivable-Lee Drake Accounts Receivable-Jenny Green Accounts Receivable-Mike Lamb Feedback Under the direct write-off method, Bad Debt Expense is recorded when the customer's account is determined to be worthless and written-off. There is no adjusting entry at year-end to record estimated bad debt. b. 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. If an amount box does not require an entry, leave it blank. Allowance for Doubtful Accounts Accounts Receivable-Kim Abel Accounts Receivable-Lee Drake Accounts Receivable-Jenny Green Accounts Receivable-Mike Lamb Bad Debt Expense Allowance for Doubtful Accounts Feedback Under the allowance method once a customer's account is identified as uncollectible, it is written off against the allowance account. c. How much higher (lower) would Seaforth International's net income have been under the allowance method than under the direct write-off method? Lower $

Answer 1

Journal entries in the books of Seaforth International
Direct write- off method
Date	Account	Debit	Credit
Dec-31	Bad Debt Expense	$103,100
	Account Receivable - Kim Abel		$24,300
	Account Receivable - Lee Drake		$31,195
	Account Receivable - Jenny Green		$29,715
	Account Receivable - Mike Lamb		$17,890
		$103,100	$103,100
(being the bad debts expenses recorded in the books for the uncollectible
account receivables)
Allowance method
Date	Account	Debit	Credit
Dec-31	Allowance for Doubtful Accounts	$103,100
	Account Receivable - Kim Abel		$24,300
	Account Receivable - Lee Drake		$31,195
	Account Receivable - Jenny Green		$29,715
	Account Receivable - Mike Lamb		$17,890
		$103,100	$103,100
(being the uncollectible accounts receivable adjusted against the Allowance for
Doubtful Accounts balance)
Given in the question
Opening Balance of Allowance for Doubtful Debts			$89,000
Computation of Allowance for Doubt Debts for the year
	Ageing	Account Receivable	% of Uncollectible Account	Allowance for Doubtful Debt
	0-30 days	$735,000	1%	$7,350
	31-60 days	$290,000	2%	$5,800
	61-90 days	$111,000	15%	$16,650
	91-120 days	$70,000	30%	$21,000
	more than 120 days	$94,000	60%	$56,400
		$1,300,000		$107,200
Hence, the closing balance of Allowance for doubtful debts account = $ 107,200
Computation of adjusting entry
Opening Balance + Adjusting entry - Bad debts Adjusted = Closing Balance
$ 89,000 + Adjusting entry - $ 103,100 = $ 107,200
Adjusting entry = $ 107,200 + $ 103,100 - $ 89,000
= $ 121,300
Journal entry to record the year end adjustment
Date	Account	Debit	Credit
Dec-31	Bad Debts - adjustment entry	$121,300
	Allowance for Doubtful Accounts		$121,300
		$121,300	$121,300
(being the year end adjustment entry made in the books to record the uncollectible
accounts receivable as per the estimates)
Comparision of the expenses recorded under the two method
Particulars			Amount
Bad debt expenses under Direct write- off method			$103,100
Bad debt expenses under Allowance method			$121,300
Since, the Bad debt expenses under allowance method are higher than amount under
direct write-off method, the net income under the allowance method is
LOWER by $ 18,200