Question

During its first year of operations, Fisher Plumbing Supply Co. had sales of $340,000, wrote off $3,000 of accounts as uncollectible using the direct write-off method, and reported net income of $37,400. Assume that during the second year of operations Fisher Plumbing Supply Co. had sales of $408,000, wrote off $3,600 of accounts as uncollectible using the direct write-off method, and reported net income of $40,800. a. Determine what net income would have been in the second year if the allowance method (using 1 1/2% of sales) had been used in both the first and second years. $ 42,360 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. $

Answer 1

1		1st year	2nd year
	Sales	340000	408000
	Allowance method 1.5%	5100	6120
	Net income direct method	37400	40800
Add	Direct write off	3000	3600
	Net income before writing of	40400	44400
Less	Allowance for doubtful accounts	5100	6120
	Net income using allowance method	35300	38280
2	Allowance for doubtful accounts	1st year	2nd year
	Beginning balance	0	2100
Add	Allowance method write off	5100	6120
	Total	5100	8220
Less	Write off	3000	3600
	Ending balance	2100	4620