# The following selected transactions were taken from the records of Shipway Company for the first...

## Question:

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31, 2016:

 Apr. 13 Wrote off account of Dean Sheppard, $8,450 May 15 Received$500 as partial payment on the $71,00 account of Dan Pyle. Wrote off the remaining balance as uncollectible. July 27 Received$8,450 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 - $2,225; Duane DeRosa -$3,550; Teresa Galloway - $4,770; Ernie Klatt -$1,275; Marty Richey - $1,690 31 If necessary, record the year-end adjusting entry for uncollectible amounts. a. Journalize the transactions for 2016 under the direct write-off method. If no entry is required, simply skip to the next transaction. b. Journalize the transactions for 2016 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, 44% of credit sales are expected to be uncollectible. Shipway Company recorded$3, 778,000 of credit sales during 2016. If no entry Is required, simply skip to the next transaction.

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

## Computation for the Allowance for Doubtful Accounts:

When the basis provided for estimating bad debts or allowance for doubtful account is based on percentage of sale or net sales, the amount computed will be the bad debts expense for the period. On the other hand, if the basis is on percentage of accounts receivables, the amount computed will b the required allowance for doubtful accounts.

## Answer and Explanation:

A.

 Date Account Debit Credit April 13 Bad Debts Expense 8,450 Accounts Receivables-Dean Sheppard 8,450 May 15 Cash 500 Bad Debts Expense 70,500 AR-Dan Pyle 71,000 July 27 Accounts Receivables -Dean Sheppard 8,450 Bad Debt Expense 8,450 Cash 8,450 Accounts Receivables -Dean Sheppard 8,450 Dec. 31 Bad Debt Expense 13,510 Accounts Receivables -Paul Chapman 2,225 AR-Duane DeRosa 3,550 AR-Teresa Galloway 4,770 AR-Ernie Klatt 1,275 AR- Marty Ritchie 1,690

B.

 Date Account Debit Credit Jan. 1 Bad Debt Expense (3,778,000*44%) 1,662,320 Allowance for Bad Debts 1,662,320 April 13 Allowance for Bad Debts 8,450 Accounts Receivables -Dean Sheppard 8,450 May 15 Cash 500 Allowance for Bad Debts 70,500 Accounts Receivables -Dan Pyle 71,000 July 27 Accounts Receivables -Dean Sheppard 8,450 Allowance for Bad Debts 8,450 Cash 8,450 Accounts Receivables -Dean Sheppard 8,450 Dec. 31 Allowance for Bad Debts 13,510 Accounts Receivables -Paul Chapman 2,225 Accounts Receivables -Duane DeRosa 3,550 Accounts Receivables -Teresa Galloway 4,770 Accounts Receivables -Ernie Klatt 1,275 Accounts Receivables - Marty Ritchie 1,690

C.

 Bad Debts Expense- Direct Write off Method 84,010 Bad Debts Expense- Allowance Method 1,662,320 Difference when Direct Method is used 1,578,310