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Effect of Doubtful Accounts on Net Income During its first year of operations, Mack's Plumbing Supply...

Effect of Doubtful Accounts on Net Income

During its first year of operations, Mack's Plumbing Supply Co. had sales of $480,000, wrote off $7,000 of accounts as uncollectible using the direct write-off method, and reported net income of $52,800.

Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $576,000, wrote off $8,400 of accounts as uncollectible using the direct write-off method, and reported net income of $57,600.

a. Determine what net income would have been in the second year if the allowance method (using 1-1/2% 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.
$

Solutions

Expert Solution

(a)

Net income would have been in the second year if the allowance method (using 1½% of net sales) had been used in both the first and second years.

NET INCOME IN 2ND YEAR

Expense under direct write off     :    $ 8400

Expense under Allowance: ($ 576000*1.5%) = $ 8640

which means expense is Understated by $ 240

so, the net income under allowance would be $ 57600 - $ 240 = $ 57360

Note: When using percentage of sales as a basis, the balance in the Allowance account is ignored and has no effect on net income.

(b)

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.

1st year
4,800,00 x 0.015 = $7200 balance in Allowance account
72,00 - 7000 written off = $ 200 ending balance in Allowance account

2nd year
5,76000 x 0.015 = $ 8640 added to Allowance account
$ 200 +240( 8640 - $8400) written off in 2nd year = $ 440 balance end of 2nd year

ekkarill92 answered 1 year ago
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