Question

Delores Cooper operates Cooper Garden Designs. Most of her customers pay cash so she uses the direct write-off method to account for uncollectible accounts receivable. On May 3, 2020, she determined that the $3,450 account for Wilma Benz was uncollectible. During 2020, she had total credit sales of $349,000. The December 31, 2020, balance in accounts receivable was $62,000. Prepare the journal entry to record the May 3 write- off using the direct write-off method.

Analysis Component:

Delores wants to compare the effect of using the allowance method versus the direct write-off method for recording uncollectible accounts. If uncollected accounts were estimated at (a) 2% of credit sales or (b) 4% of outstanding accounts receivable, prepare a comparison of the effects on profit of using the allowance methods versus the direct write-off method.

Answer 1

Journal Entries - Delores Cooper
Date	Particulars	Debit	Credit
3-May	Bad debts expense Dr	$3450
	To Accounts receivables - Wilma Benz		$3450
	(To record bad debts expense)

Analysis:

a. Bad debts expense using % of credit sales = $349000 *2% = $6980

Decrease in profit = $6980 - $3450 = $3530

b, Bad debts expense using % of outstanding receivables = $62000*4% = $2480

Increase in profit = $3450 - $2480 = $970

a.	Using 2% of credit sales
	Effect on profit	decreases	by	$3530
b.	Using 4% of outstanding accounts receivables
	Effect on profit	Increases	by	$970