Question

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. 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.

Answer 1

Answer:

$593,000

Explanation:

Net income before debt in second year:

= Reported net income + wrote off accounts as uncollectible

= 600,000 + 34,000  

= $634,000

Net income = Net income before debt in second year - Bad debts expense

                   = $634,000  - (1% of 4,100,000)

                   = $634,000  - 41,000

                   = $593,000