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Concept explainers
Requirement 1:
To record: Each transaction using the allowance method.
Requirement 1:
![Check Mark](/static/check-mark.png)
Explanation of Solution
Allowance method:
It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method,
Date | Account Title and Explanation | Debit($) | Credit($) | |
a. |
| 190,000 | ||
Service revenue | 190,000 | |||
(To record the services rendered on account) |
Table (1)
Description:
Company BHA, has provided services on account, this increases accounts receivable and service revenue. Hence,
- An increase in accounts receivable (asset account) is debited with $190,000 and
- An increase in sales revenue (
stockholders’ equity account) is credited with $190,000.
Journal entry for collecting cash from customers on account:
Date | Account Title and Explanation | Debit($) | Credit($) | |
b. | Cash | 185,000 | ||
Accounts receivable | 185,000 | |||
(To collect cash on account) |
Table (2)
Description:
- An increase in cash (asset account) is debited with $185,000 and
- A decrease in accounts receivable (asset account) is credited with $185,000.
Journal entry at the end of 2015 for uncollectible accounts:
Date | Particulars | Debit | Credit | |
c. | Bad debt expense (1) | $4,650 | ||
Allowance for uncollectible accounts | $4,650 | |||
(To adjust the allowance for uncollectible accounts) |
Table (3)
Description:
- An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $4,650, and
- An increase in allowance for uncollectible accounts (contra asset account) is credited with $4,650.
Working notes:
To determine the balance of accounts receivable at the end of the year 2015, prepare T account for accounts receivable:
Accounts receivable | |||
Opening Balance | $26,000 | Cash | $185,000 |
Service revenue | $190,000 | ||
Bal. | $31,000 |
Calculation of uncollectible accounts at the end of 2015:
Entry for the allowance for uncollectible accounts:
Date | Particulars | Debit | Credit | |
d. | Allowance for uncollectible accounts | 8,000 | ||
Accounts receivable | 8,000 | |||
(To record write-off actual bad debts) |
Table (4)
Description:
- A decrease in allowance for uncollectible accounts (contra asset account) is debited with $8000 and,
- A decrease in accounts receivable accounts (asset account) is credited with $8,000.
Requirement 2:
To record: Each transaction using the direct write-off method.
Requirement 2:
![Check Mark](/static/check-mark.png)
Explanation of Solution
Direct write-off method:
This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.
Journal entry for installing air conditioning systems on account:
Date | Account Title and Explanation | Debit($) | Credit($) | |
a. | Accounts receivable | 190,000 | ||
Service revenue | 190,000 | |||
(To record the services rendered on account) |
Table (5)
Description:
Company BHA, has provided services on account, this increases accounts receivable and service revenue. Hence,
- An increase in accounts receivable (asset account) is debited with $190,000 and
- An increase in sales revenue (stockholders’ equity account) is credited with $190,000.
Journal entry for collecting cash from customers on account:
Date | Account Title and Explanation | Debit($) | Credit($) | |
b. | Cash | 185,000 | ||
Accounts receivable | 185,000 | |||
(To collect cash on account) |
Table (6)
Description:
- An increase in cash (asset account) is debited with $185,000 and
- A decrease in accounts receivable (asset account) is credited with $185,000.
c. No entry required
Description:
Direct write-off method:
Direct write-off method reduces accounts receivable and records bad debts at the time of account receivable is proved uncollectible and it has no adjustment because Company BHA records the adjustment at the end of 2015 which is uncollectible.
Direct write off method records the adjustment until those bad debts are actually uncollectible.
Journal entry for the year 2016:
Date | Account Title and Explanation | Debit($) | Credit($) | |
d. | Bad debts expenses | 8,000 | ||
Accounts receivable | 8,000 | |||
(To record the actual bad debts) |
Table (7)
Description:
Journal entry for the year 2016:
- An increase in the bad debts ( decrease in stock holder’s equity) it is debited with $8,000 and
- A decrease in the accounts receivable (asset) it is credited with $8,000.
Requirement 3:
To Calculate: The difference in net income (before taxes) in 2015 and 2016 between the two methods.
Requirement 3:
![Check Mark](/static/check-mark.png)
Explanation of Solution
The difference in net income (before taxes) in 2015 and 2016 between the two methods is:
Bad debt expense | Allowance method | Direct write-off method |
2015 | $ 4,650 | $ 0 |
2016 | $ 0 | $ 8,000 |
Table (8)
Description:
- Under allowance method bad debts (2015) are recorded as $4,650, so net income would be lowered by $4,650 under allowance method when it is compared to the direct write-off method.
- Under direct write-off method bad debts (2016) are recorded as $8,000 so net income would be lowered by $8,000 under direct write-off method when it is compared to the allowance method.
- The difference in amount in both the years indicates that bad debts estimated in 2015 did not occur in 2016.
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FIN ACCT W/CONNECT >CI<
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