Journalizing transactions using the direct write-off method versus the allowance methodDuring August 2018, Lima Company recorded the following:Sales of 5133,300 ($122,000 on account; $11,300 for cash). Ignore Cost of Goods Sold.Collections on account, $106,400.Write-offs of uncollectible receivables, $990.Recovery of receivable previously written off, $800.RequirementsJournalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method.

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Asked Jan 5, 2020
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Journalizing transactions using the direct write-off method versus the allowance method

During August 2018, Lima Company recorded the following:

  • Sales of 5133,300 ($122,000 on account; $11,300 for cash). Ignore Cost of Goods Sold.
  • Collections on account, $106,400.
  • Write-offs of uncollectible receivables, $990.
  • Recovery of receivable previously written off, $800.

Requirements

  1. Journalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.
  2. Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method.
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Expert Answer

Step 1

Accounts receivable: Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Direct write-off method: This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

Write-off: Write-off refers to deduction of a certain amount from accounts receivable, when it becomes uncollectible.

Step 2

(1)

Prepare the journal entries for the given transactions as follows:

Accounting homework question answer, step 2, image 1
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Step 3

⦁ Sales made partly for cash and partly on account, which increases accounts receivable, cash, and sales revenue account. Hence, an increase in accounts receivable (asset account) is debited with $122,000, an increase in cash (asset account) is debited with $11,300 and increase in sales revenue (stockholders’ equity account) is credited with $133.300.

⦁ Collection of cash on account increases cash and decreases accounts receivable by $106,400. Hence, an increase in cash (asset account) is debited and a decrease in accounts receivable (asset account) is credited by $106,400.

⦁ To record this write-off of uncollectible receivables under direct write-off method, bad debt expense account must be increased to recognize the uncollectible and accounts receivable must be ...

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