Question

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

Apr. 13. Wrote off account of Dean Sheppard, $8,450.

May 15. Received $500 as partial payment on the $7,100 account of Dan Pyle. Wrote off the remaining balance as uncollectible.

July 27. Received $8,450 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 $2,225

Duane DeRosa 3,550

Teresa Galloway 4,770

Ernie Klatt 1,275

Marty Richey 1,690

31. If necessary, record the year-end adjusting entry for uncollectible accounts.

General Ledger

ASSETS

110 Cash

111 Petty Cash

121 Accounts Receivable-Paul Chapman

122 Accounts Receivable-Duane DeRosa

123 Accounts Receivable-Teresa Galloway

124 Accounts Receivable-Ernie Klatt

125 Accounts Receivable-Dan Pyle

126 Accounts Receivable-Marty Richey

127 Accounts Receivable-Dean Sheppard

129 Allowance for Doubtful Accounts

131 Interest Receivable

132 Notes Receivable

141 Merchandise Inventory

145 Office Supplies

146 Store Supplies

151 Prepaid Insurance

181 Land

191 Store Equipment

192 Accumulated Depreciation-Store Equipment

193 Office Equipment

194 Accumulated Depreciation-Office Equipment

LIABILITIES

210 Accounts Payable

211 Salaries Payable

213 Sales Tax Payable

214 Interest Payable

215 Notes Payable

EQUITY

310 Owner, Capital

311 Owner, Drawing

312 Income Summary

REVENUE

410 Sales

610 Interest Revenue

EXPENSES

510 Cost of Merchandise Sold

520 Sales Salaries Expense

521 Advertising Expense

522 Depreciation Expense-Store Equipment

523 Delivery Expense

524 Repairs Expense

529 Selling Expenses

530 Office Salaries Expense

531 Rent Expense

532 Depreciation Expense-Office Equipment

533 Insurance Expense

534 Office Supplies Expense

535 Store Supplies Expense

536 Credit Card Expense

537 Cash Short and Over

538 Bad Debt Expense

539 Miscellaneous Expense

710 Interest Expense

Journalize the transactions under the direct write-off method. If no entry is required, simply skip to the next transaction. Refer to the Chart of Accounts for exact wording of account titles.

B. Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during the year. If no entry is required, simply skip to the next transaction. Refer to the Chart of Accounts for exact wording of account titles.

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

Answer 1

Journal entry under direct write off method
Date	General Journal	Debit	Credit
13-Apr	Bad debt expense	$8,450
	Accounts receivable - Dean Sheppard		$8,450
	(To record write off of accounts receivable)
15-May	Cash	$500
	Bad debt expense	$6,600
	Accounts receivable - Dan Pyle		$7,100
	(To record cash collection and write off)
27-Jul	Accounts receivable - Dean Sheppard	$8,450
	Bad debt expense		$8,450
	(To reinstate the accounts receivable which was written off earlier)
27-Jul	Cash	$8,450
	Accounts receivable - Dean Sheppard		$8,450
	(To record cash collected from customer)
31-Dec	Bad debt expense	$13,510
	Accounts receivable - Paul Chapman		$2,225
	Accounts receivable - Duane DeRosa		$3,550
	Accounts receivable - Teresa Galloway		$4,770
	Accounts receivable - Ernie Klatt		$1,275
	Accounts receivable - Marty Richey		$1,690
	(To record write off of accounts receivable)
31-Dec	No adjusting journal entry required
Company uses the direct write off method and so there is no allowance for doubtful account created and accounts receivable is directly written off to bad debt expense and so there would be no adjusting entry for bad debt expense
Journal entry under allowance method
Date	General Journal	Debit	Credit
13-Apr	Allowance for doubtful accounts	$8,450
	Accounts receivable - Dean Sheppard		$8,450
	(To record write off of accounts receivable)
15-May	Cash	$500
	Allowance for doubtful accounts	$6,600
	Accounts receivable - Dan Pyle		$7,100
	(To record cash collection and write off)
27-Jul	Accounts receivable - Dean Sheppard	$8,450
	Allowance for doubtful accounts		$8,450
	(To reinstate the accounts receivable which was written off earlier)
27-Jul	Cash	$8,450
	Accounts receivable - Dean Sheppard		$8,450
	(To record cash collected from customer)
31-Dec	Allowance for doubtful accounts	$13,510
	Accounts receivable - Paul Chapman		$2,225
	Accounts receivable - Duane DeRosa		$3,550
	Accounts receivable - Teresa Galloway		$4,770
	Accounts receivable - Ernie Klatt		$1,275
	Accounts receivable - Marty Richey		$1,690
	(To record write off of accounts receivable)
31-Dec	Bad debt expense	$28,335
	Allowance for doubtful accounts		$28,335
	(To record estimated bad debt expense)
	(3778000*0.75%)
c.
Calculation of increase (decrease) in net income under direct write off than under allowance method
	Allowance method	$28,335
	Direct write off method	$20,110
	(8450+6600-8450+13510)
	Increase in net income	$8,225
The net income would increase by $8,225 due to lower bad debt expense charged in case of direct write off method