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

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31, 2014:

Apr. 13. Wrote off account of Dean Sheppard, $8,450.
May 15. Received $500 as partial payment on the $7,100 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 accounts.

a. Journalize the transactions for 2014 under the direct write-off method.

b. Journalize the transactions for 2014 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, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during 2014.

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


Answer:


a.
 Apr. 13 Bad Debt Expense 8,450
Accounts Receivable—Dean Sheppard 8,450
May 15 Cash 500
Bad Debt Expense 6,600
Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450
Bad Debt Expense 8,450
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
Dec. 31 Bad Debt Expense 13,510
Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 No entry



b.
 Apr. 13 Allowance for Doubtful Accounts 8,450
Accounts Receivable—Dean Sheppard 8,450
May 15 Cash 500
Allowance for Doubtful Accounts 6,600
Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450
Allowance for Doubtful Accounts 8,450
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
Dec. 31 Allowance for Doubtful Accounts 13,510
Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 Bad Debt Expense 28,335
Allowance for Doubtful Accounts 28,335
Uncollectible accounts estimate
($3,778,000 × 0.75% = $28,335).

c. Bad debt expense under:
Allowance method………………………...……………………………………… $28,335
Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110
Difference ($28,335 – $20,110)………………………………………………… $ 8,225
Shipway Company’s income would be $8,225 higher under the direct write-off
method than under the allowance method.




During its first year of operations, Mack’s Plumbing Supply Co. had net sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1% of net sales would be uncollectible.


Answer:
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]