The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31: Apr. 13. Wrote off account of Dean Sheppard, $2,120.
May 15. Received $1,060 as partial payment on the $2,820 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July 27. Received $2,120 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 $2,120 Duane DeRosa 3,590 Teresa Galloway 4,640 Ernie Klatt 1,310 Marty Richey 1,715

31 If necessary, record the year-end adjusting entry for uncollectible accounts.

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

Shipway Company

Journal Entries:

a. Direct Method:

Apr. 13. Debit Bad Debts Expense $2,120

Credit Accounts Receivable (Dean Sheppard) $2,120

To write-off account deemed uncollectible.

May 15. Debit Cash $1,060

Debit Bad Debts Expense $1,760

Credit Accounts Receivable (Dan Pyle) $2,820

To record the receipt of cash and write-off of uncollectible balance.

July 27. Debit Accounts Receivable $2,120

Credit Bad Debts Expense $2,120

To reinstate the account.

Debit Cash $2,120

Credit Accounts Receivable $2,120

To record the receipt of cash.  

Dec. 31 Debit Bad Debts Expense $13,375

Credit Accounts Receivable $13,375

To write-off the following uncollectible accounts: Paul Chapman $2,120 Duane DeRosa 3,590 Teresa Galloway 4,640 Ernie Klatt 1,310 Marty Richey 1,715.

b. Allowance Method:

Apr. 13. Debit Allowance for Uncollectibles $2,120

Credit Accounts Receivable (Dean Sheppard) $2,120

To write-off account deemed uncollectible.

May 15. Debit Cash $1,060

Debit Allowance for Uncollectibles $1,760

Credit Accounts Receivable (Dan Pyle) $2,820

To record the receipt of cash and write-off of uncollectible balance.

July 27. Debit Accounts Receivable $2,120

Credit Allowance for Uncollectibles $2,120

To reinstate a previously written-off account.

Debit Cash $2,120

Credit Accounts Receivable $2,120

To record the receipt of cash on account.

Dec. 31 Debit Allowance for Uncollectibles $13,375

Credit Accounts Receivable $13,375

To write-off of uncollectible accounts.

c. The amount by which Shipway Company’s net income would have been higher (lower) under the direct write-off method than under the allowance method is:

= $0

Explanation:

a) Data and Analysis:

Direct Method:

Apr. 13. Bad Debts Expense $2,120 Accounts Receivable (Dean Sheppard) $2,120

May 15. Cash $1,060 Bad Debts Expense $1,760 Accounts Receivable (Dan Pyle) $2,820

July 27. Accounts Receivable $2,120 Bad Debts Expense $2,120 Cash $2,120 Accounts Receivable $2,120  

Dec. 31 Bad Debts Expense $13,375 Accounts Receivable $13,375

Uncollectible accounts: Paul Chapman $2,120 Duane DeRosa 3,590 Teresa Galloway 4,640 Ernie Klatt 1,310 Marty Richey 1,715

Allowance Method:

Apr. 13. Allowance for Uncollectibles $2,120 Accounts Receivable (Dean Sheppard) $2,120

May 15. Cash $1,060 Allowance for Uncollectibles $1,760 Accounts Receivable (Dan Pyle) $2,820

July 27. Accounts Receivable $2,120 Allowance for Uncollectibles $2,120 Cash $2,120 Accounts Receivable $2,120

Dec. 31 Allowance for Uncollectibles $13,375 Accounts Receivable $13,375

Uncollectible accounts: Paul Chapman $2,120 Duane DeRosa 3,590 Teresa Galloway 4,640 Ernie Klatt 1,310 Marty Richey 1,715

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