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 1.5% 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. If required, use the minus sign to indicate a "debit" balance.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
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 1.5% of sales) had been used in both the first and second years.
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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. If required, use the minus sign to indicate a "debit" balance.
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