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 $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.

a. Determine what net income would have been in the second year if the allowance method (using 1% 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

a
Sales in the 2nd year = $4,100,000
Provision for Bad debts (Using Allowance methhod 1% of Sales) $41,000
Bad debts wrote off(using Direct write off method )    $34,000
Bad debts during the year $7,000
Net income for the 2nd year $600,000 -$7,000 = $593,000
b.
1st Year
Sales in the Ist year =   $3,250,000
Provision for Bad debts (Using Allowance methhod 1% of Sales) $32,500
Bad debts wrote off(using Direct write off method ) - $27,800
Bad debts during the year $4,700

2nd Year
Sales in the 2nd year =   $4,100,000
Provision for Bad debts (Using Allowance methhod 1% of Sales) $41,000
Bad debts wrote off(using Direct write off method )    $34,000
Bad debts during the year $7,000
Balance of the allowance for doubtful accounts = $4700 + $7,000 = $11,700

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