EX 9-14 Entries for bad debt expense under the direct write-off and allowance methods

The following selected transactions were taken from the records of Silhouette Company for the year ending December 31, 2012:
Mar.  4. Wrote off account of Myron Rimando, $7,500.
May 19. Received $2,000 as partial payment on the $10,000 account of Shirley Mason. Wrote off the remaining balance as uncollectible.
Aug.  7. Received the $7,500 from Myron Rimando, which had been written off on March 4. Reinstated the account and recorded the cash receipt.
Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):
           Brandon Peele                 $ 5,000
           Clyde Stringer                    9,000
           Ned Berry                         13,000
           Mary Adams                      2,000
           Gina Bowers                      4,500
Dec. 31. If necessary, record the year-end adjusting entry for uncollectible accounts.
a. Journalize the transactions for 2012 under the direct write-off method.

b. Journalize the transactions for 2012 under the allowance method, assuming that the allowance account had a beginning balance of $45,000 on January 1, 2012, and the company uses the analysis of receivables method. Silhouette Company prepared the following aging schedule for its accounts receivable:
Aging Class  Receivables Balance on December 31 Estimated Percent of Uncollectible Accounts
0–30 days                     $300,000                                                          1%
31–60 days                       80,000                                                          4
61–90 days                       20,000                                                         15
91–120 days                     10,000                                                         40
More than 120 days         40,000                                                         80
Total receivables          $450,000

c. How much higher (lower) would Silhouette’s 2012 net income have been under the direct write-off method than under the allowance method?

Answer:

a.
Mar. 14
Bad Debt Expense........................................ 7,500      
                    Accounts Receivable—Myron Rimando  7,500

May 19
Cash.............................................................. 2,000    
Bad Debt Expense........................................ 8,000      
                   Accounts Receivable—Shirley Mason..  10,000

Aug. 7
Accounts Receivable—Myron Rimando .... 7,500      
                    Bad Debt Expense..................................  7,500    

        7
Cash.............................................................. 7,500      
                   Accounts Receivable—Myron Rimando  7,500

Dec. 31
Bad Debt Expense........................................ 33,500      
                    Accounts Receivable—Brandon Peele.  5,000      
                    Accounts Receivable—Clyde Stringer..  9,000      
                    Accounts Receivable—Ned Berry.........  13,000      
                    Accounts Receivable—Mary Adams.....  2,000  
                    Accounts Receivable—Gina Bowers....  4,500
   
        31 No entry

b.
Mar. 4
Allowance for Doubtful Accounts............... 7,500      
                 Accounts Receivable—Myron Rimando  7,500

May 19
Cash.............................................................. 2,000    
Allowance for Doubtful Accounts............... 8,000      
                 Accounts Receivable—Shirley Mason..  10,000

Aug. 7
Accounts Receivable—Myron Rimando .... 7,500      
                  Allowance for Doubtful Accounts.........  7,500    

        7
Cash.............................................................. 7,500      
                Accounts Receivable—Myron Rimando  7,500

Dec. 31
Allowance for Doubtful Accounts............... 33,500      
                Accounts Receivable—Brandon Peele.  5,000      
                Accounts Receivable—Clyde Stringer..  9,000      
                Accounts Receivable—Ned Berry.........  13,000      
                Accounts Receivable—Mary Adams.....  2,000      
                Accounts Receivable—Gina Bowers....  4,500

31
Bad Debt Expense........................................ 41,700      
                Allowance for Doubtful Accounts.........  41,700      
                      Uncollectible accounts estimate.      
                        ($45,200 – $3,500)  

Estimated balance of allowance account from aging schedule...... $45,200
Unadjusted credit balance of allowance account.............................  3,500*
Adjustment....................................................................................... $41,700  
*$45,000 – $7,500 – $8,000 + $7,500 – $33,500 = $3,500

c.
Bad debt expense under:  
             Allowance method ......................................................................... $41,700  
             Direct write-off method ($7,500 + $8,000 – $7,500 + $33,500).....  41,500  
             Difference........................................................................................ $ 200  

Silhouette’s income would be $200 higher under the direct method than under the allowance method