# Effect of doubtful accounts on net income Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co. had sales of $4,100,000, wrote off$34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000. a. Determine what net income would have been in the second year if the allowance method (using 1% 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. Hint: Use an Allowance for Doubtful Accounts T account. BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 #### Solutions Chapter Section Chapter 9, Problem 9.16EX Textbook Problem ## Effect of doubtful accounts on net incomeUsing the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co. had sales of$4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of$600,000. a. Determine what net income would have been in the second year if the allowance method (using 1% 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. Hint: Use an Allowance for Doubtful Accounts T account.

Expert Solution

(a)

To determine

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.

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 in the second year, if Company MPS estimated that 1% of sales would be uncollectible, instead of using direct write off method.

### Explanation of Solution

Calculate net income under allowance method.

 Particulars Amount Amount Net income under direct method $600,000 Bad debt expense under direct method$34,000 Bad debt expense under allowance method     ($4,100,000×1%)$41,000 Less: Increase in bad debt expense under allowance method \$7,000
Expert Solution

(b)

To determine
The allowance for doubtful accounts balance would have been at the end of year 2, if Company MPS uses allowance method instead of direct method in both of its year 1 and 2.

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