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 $430,000, wrote off $6,900 of accounts as uncollectible using the direct write-off method, and reported net income of $47,300. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1-3/4% of sales would be uncollectible $429,375 X Feedback Y Check My Work Under the direct write-off method, Bad Debt Expense is recorded when the customer's account is determined to be worthless and written-off. There is no adjusting entry at year-end to record estimated bad debt. To compute net income using the allowance method, first compute net income before write-off of accounts associated with the bad debt expense. Then determine how an amount estimated for Bad Debt Expense based on a percent of sales, would affect that net income Learning Objective 5

Explanation / Answer

Calculate net income under allowance method :

Net income 47300 Add: Write off amount 6900 Net income before write off 54200 Less: Bad debt expense under allowance method (430000*7/4%) -7525 Net income 46675

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