Question

Effect of Doubtful Accounts on Net IncomeDuring its first year of operations, Mack's Plumbing Supply Co. had sales of $630,000, wrote off $10,100 of accounts as uncollectible using the direct write-off method, and reported net income of $69,300. Determine what the net income would have been if the allowance method had been used, and the company estimated that 2.5% of sales would be uncollectible.

Answer 1

Mack's Plumbing Supply Co.

Effect of Doubtful Accounts on Net Income

Mack's would have reduced the net income further by $5,650.

This implies that net income reported would have been $63,650 ($69,300 - $5,650).

Step-by-step explanation:

Sales revenue = $630,000

Allowance method = 2.5% of sales as uncollectible.

Uncollectible Allowance = $15,750 ($630,000 * 2.5%)

Direct write-off method, uncollectible allowance = $10,100

Reported net income = $69,300

Effect on net income of using the allowance method = $63,650 ($69,300 - $15,750 + $10,100)