Chapter 8, Problem 3BE

a.

To determine

Prepare the journal entry to record the write off and the subsequent recovery of W assuming that Company M uses allowance method of handling credit losses.

Explanation of Solution

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 doubtful account.

Prepare the journal entry to record the write off and the subsequent recovery of W’s account under allowance method as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
April, 12	Allowance for doubtful accounts	1,000
	Accounts receivable – Company W		1,000
	(To write off the Company W’s account)

Table (1)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable – Company W account for $1,000.

Prepare the journal entry to record reinstate the account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 5	Accounts receivable – Company W	700
	Allowance for doubtful accounts		700
	(To reinstate the Company W’s account to the extent of the recovery)

Table (2)

• Accounts receivable is a current asset, it is increased. Therefore, debit accounts receivable account for $700.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $700.

Prepare the journal entry to record receipt of cash.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 5	Cash	700
	Accounts receivable – Company W		700
	(To record the collection of cash on account.)

Table (3)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $700.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $700.

b.

To determine

Prepare the journal entry to record the write off and the subsequent recovery of W assuming that Company M uses direct write off method of handling credit losses.

Explanation of Solution

Direct write-off method:

Under this method, firms report the estimated uncollectible amount to Bad debts expense. Under the direct write-off method, only the actual losses are recorded as bad debt expense. The gross amount of the accounts receivable is only recorded in the financial statements.

Prepare the journal entry to record the write off and the subsequent recovery of W’s account under direct write off method as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
April, 12	Bad Debts Expense	1,000
	Accounts Receivable		1,000
	(To write off the Company W’s account)

Table (4)

• Bad debts expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,000.

Prepare the journal entry to record reinstate the account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 5	Accounts Receivable	700
	Bad Debts Expense		700
	(To reinstate the Company W’s account to the extent of the recovery)

Table (5)

• Accounts receivable is a current asset, it is increased. Therefore, debit accounts receivable account for $700.
• Bad debts expense is a component of stockholders’ equity, and it is increased. Therefore, credit bad debts expense account for $700.

Prepare the journal entry to record receipt of cash.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 5	Cash (A+)	700
	Accounts receivable – Company W (A–)		700
	(To record the collection of cash on account.)

Table (6)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $700.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $700.

c.(1)

To determine

Prepare the journal entry to record the write off and the subsequent recovery of W assuming that Company M uses allowance method of handling credit losses.

Explanation of Solution

Prepare the journal entry to record the write off and the subsequent recovery of W’s account under allowance method as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
April, 12	Allowance for doubtful accounts (A+)	1,000
	Accounts receivable – Company W (A-)		1,000
	(To write off the Company W’s account)

Table (7)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable – Company W account for $1,000.

Prepare the journal entry to record reinstate the account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 18 (following year)	Accounts receivable – Company W	700
	Allowance for doubtful accounts		700
	(To reinstate the Company W’s account to the extent of the recovery)

Table (8)

• Accounts receivable is a current asset, it is increased. Therefore, debit accounts receivable account for $700.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $700.

Prepare the journal entry to record receipt of cash.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 18 (following year)	Cash	700
	Accounts receivable – Company W		700
	(To record the collection of cash on account.)

Table (9)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $700.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $700.

c.(2)

To determine

Prepare the journal entry to record the write off and the subsequent recovery of W assuming that Company M uses direct write off method of handling credit losses.

Explanation of Solution

Prepare the journal entry to record the write off and the subsequent recovery of W’s account under direct write off method as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
April, 12	Bad Debts Expense	1,000
	Accounts Receivable		1,000
	(To write off the Company W’s account)

Table (10)

• Bad debts expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,000.

Prepare the journal entry to record reinstate the account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January , 18 (following year)	Accounts Receivable	700
	Bad Debts Expense		700
	(To reinstate the Company W’s account to the extent of the recovery)

Table (11)

• Accounts receivable is a current asset, it is increased. Therefore, debit accounts receivable account for $700.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $700.

Prepare the journal entry to record receipt of cash.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 18 (following year)	Ca	700
	Accounts receivable – Company W		700
	(To record the collection of cash on account.)

Table (12)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $700.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $700.