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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for bad debt expense under the direct write-off and allowance methods

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:

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  1. a. Journalize the transactions under the direct write-off method.
  2. b. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $36,000 on January 1 and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:

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c.    How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?

(a)

To determine

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.

To journalize: The transactions under direct write off method.

Explanation

Journalize the transactions of Company S under direct write off method.

Date Particulars Debit Credit
June 8 Bad debt expense $8,440  
       Account receivable – Person KQ   $8,440
  (To record the write-off of uncollectible account receivable )    
 
August 14 Cash $3,000  
Bad debt expense $9,500  
       Account receivable – Person RO   $12,500
  (To record the cash collection and write-off of remaining uncollectible account receivable )    
 
October 16 Accounts receivable – Person KQ $8,440  
      Bad debt expense   $8,440
  (The reinstate the account of Person KQ)    
 
October 16 Cash $8,440  
      Accounts receivable – Person KQ   $8,440
  (To record collection of cash on account)    
 
December 31 Bad debt expense $24,995  
     Account receivable – Person WD   $4,600
       Account receivable – Person GG   $3,600
       Account receivable – Person AK   $7,150
       Account receivable – Person SP   $2,975
       Account receivable – Person NS   $6,630
  (To record the write-off of uncollectible account receivable )    
 
December 31 No entry is required    

Table (1)

For June 8:

To record this write-off of uncollectible receivables under direct write-off method, bad debt expense must be recognized as well as increased, and accounts receivable must be decreased by $8,440...

(b)

To determine

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Two methods to estimate uncollectible accounts under allowance method are:

  • Percentage of sales method, and
  • Analysis of receivables method.

Analysis of receivables method:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.

To journalize: The transactions under allowance method (Aging analysis method).

(c)

To determine
Whether net income of Company RT is higher or lower under the direct-write off method than allowance method.

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