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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 uncollectible accounts, using direct write-off method

Journalize the following transactions in the accounts of Champion Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:

Jan. 19. Sold merchandise on account to Dr. Dale Van Dyken, $30,000. The cost of the merchandise sold was $20,500.
July 7. Received $12,000 from Dr. Dale Van Dyken and wrote off the remainder owed on the sale of January 19 as uncollectible.
Nov. 2. Reinstated the account of Dr. Dale Van Dyken that had been written off on July 7 and received $18,000 cash in full payment.

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 transaction of Company C.

Explanation

Prepare the journal entry to record the sale of merchandise on account, and the cost of goods sold.

Date Particulars Debit Credit
January 19 Accounts receivable – Doctor D $30,000  
     Sales   $30,000
  (To record sale of merchandise on account)    
 
January 19 Cost of merchandise sold $20,500  
     Merchandise inventory   $20,500
  (To record the cost of goods sold)    

Table (1)

Sale on account increases accounts receivable and sales revenue account. Hence, an increase in accounts receivable (asset account) is debited with $30,000 and an increase in sales revenue (stockholders’ equity account) is credited with $30,000.

Cost of goods sold is $20,500. Thus the expense incurred must be recognized by increasing cost of goods sold account and the merchandise inventory which is sold out should be decreased to record the inventory which is sold out. Hence, an increase in Cost of goods sold (expense account) is debited with $20,500 and a decrease in Merchandise inventory (asset account) is credited with $20,500.

Prepare the journal entry to record the collection of cash and write-off of uncollectible accounts, under direct write-off method.

Date Particulars Debit Credit
July 7 Cash $12,000  
  Bad debt expense $18,000  
       Account receivable – Doctor D   $30,000
  (To record cash collection and write-off of uncollectible account receivable )    

Table (2)

To record the collection of cash on account, cash account must be increased and accounts receivable must be decreased by $12,000.

To record this write-off of remainder receivables of $18,000 ($30,000$12,000) under direct write-off method, bad debt expense must be recognized as well as increased, and accounts receivable must be decreased by $18,000

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