Question

Effect of Doubtful Accounts on Net Income During its first year of operations, Mack's Plumbing Supply Co. had sales of $260,000, wrote off $4,000 of accounts as uncollectible using the direct write-off method, and reported net income of $28,600. Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $312,000, wrote off $4,800 of accounts as uncollectible using the direct write-off method, and reported net income of $31,200. 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

Amount of net income would be $28,050

Step-by-step explanation:

First year:

Sales = $260,000

Write off = $4,000

Reported net income = $28,600

Second year:

Sales = $312,00

Write off = $4,800

Reported net income = $31,200

Amount of net income if the allowance method had been used, and the company estimated that 1-3/4% of sales would be uncollectible:

= $28,600 + $4,000 – ($260,000 × 1-3/4%)

= $28,600 + $4,000 - $4,550

= $28,050