Pauline’s Pottery has always used the direct write-off method to account for uncollectibles. The company’s revenues, bad-debt write offs, and year-end receivables for the most recent year follow:
Year | Revenues | Write-Offs | Receivables at Year-End |
2011 | $150,000 | $3,900 | $14,000 |
The business is applying for a bank loan, and the loan officer requires figures based on the allowance method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.
Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2011 if Pauline’s Pottery were to use the allowance method for bad debts? Please use the percentage-of-sales method.
2. How much of the receivables balance at the end of 2011 does Pauline’s Pottery actually expect to collect? (Disregard beginning account balances for the purpose of this question.)
3. Compute these amounts, and then explain for Pauline’s Pottery why net income is more or less using the allowance method versus the direct write-off method for uncollectibles.
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