Question

Effect of doubtful accounts on net income during its first year of operations, mack’s plumbing supply co. had sales of $450,000, wrote off $7,200 of accounts as uncollectible using the direct write-off method, and reported net income of $49,500. 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

Answer 1

The net income for Mack's Plumbing Supply Co. would have been $41,625 if the allowance method had been used instead of the direct write-off method, considering 1 3/4% of sales being uncollectible. The difference is due to the higher allowance for doubtful accounts compared to the actual amount written off.

Step-by-step explanation:

The student is asking about the effect of doubtful accounts on net income when using different methods of accounting for uncollectible accounts: the direct write-off method and the allowance method. In the scenario provided, Mack's Plumbing Supply Co. first reported net income using the direct write-off method, which resulted in net income of $49,500 after writing off $7,200 as uncollectible. To determine what the net income would have been using the allowance method, we must consider an estimate of 1 3/4% of sales being uncollectible.

Using the allowance method:

Calculate the estimated uncollectible amount: 1 3/4% of $450,000 sales equals $7,875.Subtract the estimated uncollectible amount ($7,875) from the reported net income ($49,500) under the direct write-off method. The adjusted net income under the allowance method would then be $49,500 - $7,875 = $41,625. The net income would have been $41,625 if the allowance method had been used for Mack's Plumbing Supply Co., which is lower than the reported $49,500 using the direct write-off method because the allowance for doubtful accounts is higher than the actual accounts written off.