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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

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:

Customer Amount
Kim Abel $ 21,550
Lee Drake 33,925
Jenny Green 27,565
Mike Lamb 19,460
Total $102,500

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 $ 715,000 1%
31-60 days 310,000 2
61-90 days 102,000 15
91-120 days 76,000 30
More than 120 days 97,000 60
Total receivables $1,300,000
  1. a. Journalize the write-offs under the direct write-off method.
  2. b. Journalize the write-offs and the year-end ad adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $ 95,000 on January 1 and the company uses the analysis of receivables method.
  3. c. How much higher (lower) would Seaforth International’s net income have been under the allowance method than under the direct write-off method?

(a)

To determine

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.

To journalize: The write-offs under the direct write-off method.

Explanation

Journalize the write offs under the direct write off method.

Date Particulars Debit Credit
  Bad debt expense $102,500  
       Account receivable – Person KA   $21,550
       Account receivable – Person LD   $33,925
       Account rece...

(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.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

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 write-offs under allowance method (Analysis of receivables method).

(c)

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

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