Chapter 5, Problem 5.13E

Requirement 1 a:

To determine

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

To record: Each transaction using the allowance method.

Answer to Problem 5.13E

Journal entry for installing air conditioning systems on account:

Date	Account Title and Explanation		Debit($)	Credit($)
2018	Accounts receivable		190,000
		Service revenue		190,000
	(To record the services rendered on account)

Table (1)

Explanation of Solution

Company BHA, has provided services on account, this increases accounts receivable and service revenue. Hence,

• An increase in accounts receivable (asset account) is debited with $190,000 and
• An increase in sales revenue (stockholders’ equity account) is credited with $190,000.

Requirement 1 b:

To determine

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

To record: Each transaction using the allowance method.

Answer to Problem 5.13E

Journal entry for collecting cash from customers on account:

Date	Account Title and Explanation		Debit($)	Credit($)
2018	Cash		185,000
		Accounts receivable		185,000
	(To collect cash on account)

Table (2)

Explanation of Solution

• An increase in cash (asset account) is debited with $185,000 and
• A decrease in accounts receivable (asset account) is credited with $185,000.

Requirement 1 c:

To determine

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

To record: Each transaction using the allowance method.

Answer to Problem 5.13E

Journal entry at the end of 2018 for uncollectible accounts:

Date	Particulars		Debit	Credit
2018	Bad debt expense (1)		$4,650
		Allowance for uncollectible accounts		$4,650
	(To adjust the allowance for uncollectible accounts)

Table (3)

Explanation of Solution

• An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $4,650, and
• An increase in allowance for uncollectible accounts (contra asset account) is credited with $4,650.

Working notes:

To determine the balance of accounts receivable at the end of the year 2018, prepare T account for accounts receivable:

Accounts receivable
Opening Balance	$26,000	Cash	$185,000
Service revenue	$190,000
		Bal.	$31,000

Calculation of uncollectible accounts at the end of 2018:

$\begin{array}{c}\text{Uncollectible accounts}=\left[\begin{array}{l}\text{Balance of accounts receivable}\times \\ \text{ uncollectible accounts estimate}\end{array}\right]\\ =\$31,000\times 15\%\\ =\$4,650\end{array}$ (1)

Requirement 1 d:

To determine

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

To record: Each transaction using the allowance method.

Answer to Problem 5.13E

Entry for the allowance for uncollectible accounts:

Date	Particulars		Debit	Credit
2019	Allowance for uncollectible accounts		8,000
		Accounts receivable		8,000
	(To record write-off actual bad debts)

Table (4)

Explanation of Solution

• A decrease in allowance for uncollectible accounts (contra asset account) is debited with $8000 and,
• A decrease in accounts receivable accounts (asset account) is credited with $8,000.

Requirement 2:

To determine

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To record: Each transaction using the direct write-off method.

Answer to Problem 5.13E

Journal entry for installing air conditioning systems on account:

Date	Account Title and Explanation		Debit($)	Credit($)
2018	Accounts receivable		190,000
		Service revenue		190,000
	(To record the services rendered on account)

Table (5)

Explanation of Solution

Company BHA, has provided services on account, this increases accounts receivable and service revenue. Hence,

• An increase in accounts receivable (asset account) is debited with $190,000 and
• An increase in sales revenue (stockholders’ equity account) is credited with $190,000.

b.

To determine

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To record: Each transaction using the direct write-off method.

Answer to Problem 5.13E

Journal entry for collecting cash from customers on account:

Date	Account Title and Explanation		Debit($)	Credit($)
2018	Cash		185,000
		Accounts receivable		185,000
	(To collect cash on account)

Table (6)

Explanation of Solution

• An increase in cash (asset account) is debited with $185,000 and
• A decrease in accounts receivable (asset account) is credited with $185,000.

c.

To determine

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To record: Each transaction using the direct write-off method.

Answer to Problem 5.13E

No entry required

Explanation of Solution

Direct write-off method:

Direct write-off method reduces accounts receivable and records bad debts at the time of account receivable is proved uncollectible and it has no adjustment because Company BHA records the adjustment at the end of 2018 which is uncollectible.

Direct write off method records the adjustment until those bad debts are actually uncollectible.

d.

To determine

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To record: Each transaction using the direct write-off method.

Answer to Problem 5.13E

Journal entry for the year 2019:

Date	Account Title and Explanation		Debit($)	Credit($)
2019	Bad debts expenses		8,000
		Accounts receivable		8,000
	(To record the actual bad debts)

Table (7)

Explanation of Solution

Journal entry for the year 2019:

• An increase in the bad debts ( decrease in stock holder’s equity) it is debited with $8,000 and
• A decrease in the accounts receivable (asset) it is credited with $8,000.

Requirement 3:

To determine

Calculate the difference in net income (before taxes) in 2018 and 2019 between the two methods.

Answer to Problem 5.13E

The difference in net income (before taxes) in 2018 and 2019 between the two methods is:

Bad debt expense	Allowance method	Direct write-off method
2018	$ 4,650	$ 0
2019	$ 0	$ 8,000

Table (8)

Explanation of Solution

• Under allowance method bad debts (2018) are recorded as $4,650, so net income would be lowered by $4,650 under allowance method when it is compared to the direct write-off method.
• Under direct write-off method bad debts (2019) are recorded as $8,000 so net income would be lowered by $8,000 under direct write-off method when it is compared to the allowance method.
• The difference in amount in both the years indicates that bad debts estimated in 2018 did not occur in 2019.