27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Effect of doubtful accounts on net income

During its first year of operations, Mack’s Plumbing Supply Co. had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.

To determine

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account. This method debit allowance for doubtful accounts and credits accounts receivable to write-off the uncollectible accounts.

To determine: The amount of net income would have been, if Company MPS estimated that 1% of sales would be uncollectible, instead of using direct write off method.


Determine the net income under allowance method as follows:

Particulars Amount Amount
Net income under direct method   $487,500
    Bad debt expense under direct method $27,800  

    Bad debt expense under allowance method



Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

For a stock to be in equilibrium, what two conditions must hold?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Why should policymakers think about incentives?

Principles of Economics (MindTap Course List)

(a) What kind of an account is Purchases Discounts Lost? (b) How is this item reported on the income statement?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

Why is the journal called a book of original entry?

College Accounting (Book Only): A Career Approach

Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)