Question

During its first year of operations, Mack's Plumbing Supply Co. had sales of $6,740,000, wrote off $48,600 of accounts as uncollectible using the direct write-off method, and reported net income of $712,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.

Answer 1

The net income of Mack's Plumbing Supply Co. would have been $693,700 if the allowance method with an estimate of 1% of sales being uncollectible were used, instead of the direct write-off method.

Step-by-step explanation:

The student has asked to calculate what the net income would have been for Mack's Plumbing Supply Co. if the allowance method for accounting for uncollectibles had been used instead of the direct write-off method. To do this, we need to adjust the reported net income by reversing the actual write-offs and applying the estimated uncollectible amount using the allowance method.

Under the direct write-off method, the company wrote off $48,600, and the net income was $712,500. If we use the allowance method, we would estimate uncollectible accounts based on 1% of sales, equating to:

1% of $6,740,000 in sales = $67,400

We would then adjust the net income to reflect this new estimation:

Net Income with allowance method = Reported Net Income + Write-offs under direct method - Estimated Uncollectible Accounts using allowance method

Net Income with allowance method = $712,500 + $48,600 - $67,400

Net Income with allowance method = $693,700

Thus, if the allowance method had been used, the net income would have been $693,700.

Answer 2

Answer: 693700

Step-by-step explanation:

Apply the 1% to the sales of 6,740,000.

( 6,740,000 x .01 ) = 67,400

Subtract by the original write off 48,600 from the total

( 67,400 - 48600 ) = 18,800

Subtract this from the reported net income.

( 712,500 - 18800 ) = 693,700

Hope this helps.