EX 9-18 Entries for bad debt expense under the direct write-off and allowance methods

Magnetics International wrote off the following accounts receivable as uncollectible for the year ending December 31, 2012:
                     Customer                          Amount
                     Trey Betts                         $15,500
                     Cheryl Carson                      9,000
                     Irene Harris                        29,700
                     Renee Putman                      3,100
                     Total                                 $57,300
The company prepared the following aging schedule for its accounts receivable on December 31, 2012:
Aging Class Receivables Balance on December 31 Estimated Percent of Uncollectible Accounts 0–30 days                                $600,000                                                1%
31–60 days                           150,000                                                 2
61–90 days                            75,000                                                 18
91–120 days                          50,000                                                 30
More than 120 days               60,000                                                 50
Total receivables                $935,000

a. Journalize the write-offs for 2012 under the direct write-off method.
b. Journalize the write-offs and the year-end adjusting entry for 2012 under the allowance method, assuming that the allowance account had a beginning balance of $55,000 on January 1, 2012, and the company uses the analysis of receivables method.
c. How much higher (lower) would Magnetics International’s 2012 net income have been under the allowance method than under the direct write-off method?

Answer:
a.
Bad Debt Expense......................................................... 57,300  
                    Accounts Receivable—Trey Betts..........................  15,500  
                    Accounts Receivable—Cheryl Carson...................  9,000  
                    Accounts Receivable—Irene Harris........................  29,700  
                    Accounts Receivable—Renee Putman...................  3,100

b.
Allowance for Doubtful Accounts................................ 57,300  
                    Accounts Receivable—Trey Betts..........................  15,500  
                    Accounts Receivable—Cheryl Carson...................  9,000  
                    Accounts Receivable—Irene Harris........................  29,700  
                    Accounts Receivable—Renee Putman...................  3,100

Bad Debt Expense......................................................... 69,800  
                    Allowance for Doubtful Accounts...........................  69,800  
                         Uncollectible accounts estimate.    
                             ($67,500 + $2,300)
 


Unadjusted debit balance of Allowance for Doubtful  
      Accounts ($57,300 – $55,000)................................... $ 2,300
Estimated balance of Allowance for Doubtful  
        Accounts from aging schedule................................  67,500 Adjustment..................................................................... $69,800

c. Net income would have been $12,500 lower in 2012 under the allowance method, because bad debt expense would have been $12,500 higher under the allowance method ($69,800 expense under the allowance method versus $57,300 expense under the direct write-off method). 

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