Reference no: EM131715010

Effect of Doubtful Accounts on Net Income

During its first year of operations, Mack's Plumbing Supply Co. had sales of $300,000, wrote off $5,000 of accounts as uncollectible using the direct write-off method, and reported net income of $33,000.

Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $360,000, wrote off $6,000 of accounts as uncollectible using the direct write-off method, and reported net income of $36,000.

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.

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. If required, use the minus sign to indicate a "debit" balance.