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

Learn more about this topic:

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Accounts Receivable: Definition, Process & Examples

from Accounting 101: Financial Accounting

Chapter 7 / Lesson 1
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