Question

During its first year of operations, Mack’s Plumbing Supply Co. had sales of $650,000, wrote off $10,400 of accounts as uncollectible using the direct write-off method, and reported net income of $71,500. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1 3/4% of sales would be uncollectible.

Answer 1

Answer:

• If the allowance method had been used, net income would have been $81,900.
• With 1.75% of sales, if the write-off above had been recorded against the allowance account, it would have been in debit, so the bad debt expense would be $10,400 + $11,375 = $21,775. Otherwise, bad debt expense would be $11,375. The required journals would be a debit to bad debt expense and credit to allowance for doubtful accounts.

Explanation:

The following journals would have been recorded for write-off of the accounts receivables:

Debit Bad debt expense                  $10,400

Credit Accounts receivable              $10,400

(To write-off accounts receivable)

This journal would have negatively affected the net income by reducing it. If it was recorded against the allowance for doubtful accounts, net income would have increased by $10,400 ($71,500 + $10,400).

1.75% of sales is $11,375; so, if the write-off above had been recorded against the allowance account, it would have been in debit, so the bad debt expense would be $10,400 + $11,375 = $21,775. Otherwise, bad debt expense would be $11,375. The required journals would be a debit to bad debt expense and credit to allowance for doubtful accounts.