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

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.

Answer:

$482,800, computed as follows: 

Net income under direct method............................................. $487,500

Bad debt expense under direct method.................................... $27,800

Bad debt expense under allowance method

($3,250,000 × 1% )............................................................... 32,500

Less increase in bad debt expense under allowance method...... 4,700

Net income under allowance method....................................... $482,800