Entries for Bad Debt Expense under the Direct Write-Off and Allowance Methods

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:

Apr. 13.

Wrote off account of Dean Sheppard, $2,660.

May 15.

Received $1,330 as partial payment on the $3,540 account of Dan Pyle. Wrote off the remaining balance as uncollectible.

July 27.

Received $2,660 from Dean Sheppard, whose account had been written off on April 13. Reinstated the account and recorded the cash receipt.

Dec. 31.

Wrote off the following accounts as uncollectible (record as one journal entry):

Paul Chapman	$1,780
Duane DeRosa	1,330
Teresa Galloway	800
Ernie Klatt	1,120
Marty Richey	400

31.

If necessary, record the year-end adjusting entry for the uncollectible accounts.

If no entry is required, select "No entry" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank

b. Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, 1% of credit sales are expected to be uncollectible. Shipway Company recorded $1,298,800 of credit sales during the year.

Apr. 13
May 15
July 27
July 27
Dec. 31
Dec. 31

Feedback

Remember that under the direct write-off method, Bad Debt Expense is not recorded until the customer's account is determined to be worthless.

Under the allowance method once a customer account is identified as uncollectible, it is written off against the allowance account.

c. How much higher (lower) would Shipway Company's net income have been under the direct write-off method than under the allowance method?