Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co

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.

Answer:

$593,000, computed as follows: 

a. 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

Net income under allowance method................................. $593,000

b. $11,700, as shown in the following T account:

Year 1 Write-offs 27,800 Year 1 Adj. Entry 32,500

Bal. 4,700

Year 2 Write-offs 34,000 Year 2 Adj. Entry 41,000

Bal. 11,700