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21 February, 02:59

Effect of Doubtful Accounts on Net Income During its first year of operations, Mack's Plumbing Supply Co. had sales of $260,000, wrote off $4,000 of accounts as uncollectible using the direct write-off method, and reported net income of $28,600. Assume that during the second year of operations Mack's Plumbing Supply Co. had sales of $312,000, wrote off $4,800 of accounts as uncollectible using the direct write-off method, and reported net income of $31,200. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1-3/4% of sales would be uncollectible.

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  1. 21 February, 03:09
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    Amount of net income would be $28,050

    Explanation:

    First year:

    Sales = $260,000

    Write off = $4,000

    Reported net income = $28,600

    Second year:

    Sales = $312,00

    Write off = $4,800

    Reported net income = $31,200

    Amount of net income if the allowance method had been used, and the company estimated that 1-3/4% of sales would be uncollectible:

    = $28,600 + $4,000 - ($260,000 * 1-3/4%)

    = $28,600 + $4,000 - $4,550

    = $28,050
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