Question

Effect of Doubtful Accounts on Net Income

During its first year of operations, Fisher Plumbing Supply Co. had sales of $420,000, wrote off $4,000 of accounts as uncollectible using the direct write-off method, and reported net income of $46,200.

Assume that during the second year of operations Fisher Plumbing Supply Co. had sales of $504,000, wrote off $4,800 of accounts as uncollectible using the direct write-off method, and reported net income of $50,400.

a. Determine what net income would have been in the second year if the allowance method (using 1 1/4% of sales) had been used in both the first and second years.
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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.
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Answer 1

Answer to question a

Total sales during the second year $504000

Reported net income $50400 (after writing off the uncollectables)

Net income before writing off the uncollectables $55200 (50400+4800)

Amount to be written off under allowance method $6300 (1.25% of $504000)

Net income during the second year $48900 (55200-6300)

Answer to question b

Total sales during the first year $420000

Reported net income $46200 (after writing off the uncollectables)

Net income before writing off the uncollectables $50200(46200+4000)

Amount to be written off under allowance method = $5250 (1.25% of $420000)

Actual Uncollectables during the first year $4000

Balance of the allowance for doubtful account at the end of first year= 1250 (5250-4000)

Amount transferred to allowance for doubtful account during second year $6300

Actual uncollectables during the second year $4800

Balance of the allowance for doubtful account at the end of the second year will be $2750 (1250+6300-4800)