Effect of Doubtful Accounts on Net Income During its first year of operations, M

Question

Effect of Doubtful Accounts on Net Income During its first year of operations, Mack's Plumbing Supply Co. had sales of $630,000, wrote off $9,000 of accounts as uncollectible using the direct write-off method, and reported net income of $69,300. Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $ 756,000, wrote off $10,800 of accounts as uncollectible using the direct write-off method, and reported net income of $75,500. a. Determine what net income would have been in the second year if the allowance method (using 1-1/2% of sales) had been used in both the first and second years. b. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years.

Explanation / Answer

Req a: Allowance for uncollectible accounts balance required is (756,000*1.5%): 11340

Less: Bad debts already written off: 10800

Increase in bad debt expense: 540

Therefore,

Net income under Allowance method is:

Net income under direct write off method: $ 75,500

Less: Increase in bad debts expense: 540

Net Income under Allowance for uncollectible account: $ 74960

Req B:

Balance in Allowance account:

First year: Sales 630,000 Allowance required 9450 (630000*1.5%) Less: Wrie off 9000 Balance in Allowance 450 Second year: Sales 756000 Bad debts expense 11340 (756000*1.5%) Add: Balance exist 450 Less: Wwrite off 10800 Balance at the end 990

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