/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 15 During its first year of operati... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 9: Problem 15

During its first year of operations, West Plumbing Supply Co. had net sales of \(\$ 1,800,000\), wrote off \(\$ 51,000\) of accounts as uncollectible using the direct write-off method, and reported net income of \(\$ 125,000\). Determine what the net income would have been if the allowance method had been used, and the company estimated that \(3 \%\) of net sales would be uncollectible.

Short Answer

Expert verified
The net income would be \(\$122,000\) using the allowance method.

Step by step solution

01

Identify Uncollectible Accounts Using the Allowance Method

Calculate the estimated uncollectible accounts by using the allowance method. With net sales of \(\$1,800,000\) and an estimate that \(3\%\) of sales are uncollectible, multiply \(1,800,000\) by \(0.03\) to find the estimated uncollectible amount.
02

Calculate Estimated Uncollectibles

The calculation will be: \[1,800,000 \times 0.03 = 54,000\] So, \(\$54,000\) would be the estimated uncollectibles using the allowance method.
03

Adjust Expense for Net Income Calculation

Under the direct write-off method, \(\\(51,000\) was already written off as an expense. Change this to the allowance method's \(\\)54,000\), adding \(\$54,000\) of estimated expenses for uncollectibles.
04

Modify Net Income Based on Allowance Method

The reported net income was \(\\(125,000\) with the direct write-off method. Now subtract the \(\\)3,000\) difference between the allowance method's estimated uncollectibles and the direct write-off method (\(54,000 - 51,000\)). The modified calculation is: \[125,000 - 3,000 = 122,000\]
05

Present Adjusted Net Income

Thus, when using the allowance method, the net income would be \(\$122,000\).

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Allowance Method
The Allowance Method is a widely used accounting technique for managing uncollectible accounts. Instead of waiting to see which specific accounts will not be paid, this method estimates the bad debts in advance, based on a percentage of net sales or accounts receivable.
This proactive approach aligns more closely with the matching principle in accounting, which aims to match revenues and expenses within the same accounting period.
  • When using the Allowance Method, companies estimate potential uncollectibles based on historical data or industry averages, such as a certain percentage of total sales.
  • In the example, West Plumbing Supply Co. used a 3% estimation of their net sales, which amounted to $54,000 as estimated uncollectibles.
  • This method involves creating an "Allowance for Doubtful Accounts" on the balance sheet, which is a contra asset account.
This account is adjusted over time to reflect actual uncollectible accounts, ensuring more accurate financial statements.
Direct Write-off Method
The Direct Write-off Method is another way to handle uncollectibles, where bad debts are only recognized when specific accounts are deemed uncollectible.
This method is simpler than the allowance method but can sometimes lead to distorted financial statements as it does not adhere to the matching principle.
  • In this method, companies directly reduce accounts receivable by the amount of the bad debt. There is no estimation involved, like in the allowance method.
  • In the exercise, West Plumbing Supply Co. wrote off $51,000 in uncollectibles in their first year using this method.

While straightforward, the Direct Write-off Method can affect financial statement accuracy, particularly in periods where sales and collections are recorded separately from related expenses.
Net Sales
Net Sales are a crucial figure used in various financial analyses, representing total revenues from sales after deducting returns, allowances, and discounts.
They provide a clear picture of the revenue generated from core operations.
  • Net sales are often a starting point for financial forecasting and estimation of uncollectibles. For West Plumbing Supply Co., the net sales were $1,800,000.
  • An essential metric for determining estimates under methods like the Allowance Method, where a percentage of net sales is used to calculate uncollectibles.

Net sales provide a comprehensive view of a company's revenue-generating abilities, which is essential for projections, various accounting estimations, and overall financial health assessment.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

At the end of the current year, the accounts receivable account has a debit balance of \(\$ 650,000\), and net sales for the year total \(\$ 5,500,000\). Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions: a. The allowance account before adjustment has a credit balance of \(\$ 3,175\). Bad debt expense is estimated at \(1 / 4\) of \(1 \%\) of net sales. b. The allowance account before adjustment has a credit balance of \(\$ 4,600\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 17,500\). c. The allowance account before adjustment has a debit balance of \(\$ 8,100\). Bad debt expense is estimated at \(1 / 2\) of \(1 \%\) of net sales. d. The allowance account before adjustment has a debit balance of \(\$ 8,100\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 24,650\).

Journalize the following transactions in the accounts of Simply Yummy Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables: June 2. Sold merchandise on account to Lynn Berry, \(\$ 16,000\). The cost of the merchandise sold was \(\$ 9,400\). Oct. 15. Received \(\$ 4,000\) from Lynn Berry and wrote off the remainder owed on the sale of June 2 as uncollectible. Dec. 30. Reinstated the account of Lynn Berry that had been written off on October 15 and received \(\$ 12,000\) cash in full payment.

Alpine Co., a building construction company, holds a 120 -day, \(9 \%\) note for \(\$ 80,000\), dated July 23 , which was received from a customer on account. On September 21 , the note is discounted at the bank at the rate of \(12 \%\). a. Determine the maturity value of the note. b. Determine the number of days in the discount period. c. Determine the amount of the discount. d. Determine the amount of the proceeds. e. Journalize the entry to record the discounting of the note on September 21 .

The accounts receivable clerk for Vandalay Industries prepared the following partially completed aging-of-receivables schedule as of the end of business on November 30. The following accounts were unintentionally omitted from the aging schedule and not included in the subtotals above: $$ \begin{array}{lrl} \text { Customer } & \text { Balance } & \text { Due Date } \\ \hline \text { Tamika Industries } & \$ 25,000 & \text { August 24 } \\ \text { Ruppert Company } & 8,500 & \text { September 3 } \\ \text { Welborne Inc. } & 35,000 & \text { October 17 } \\ \text { Kristi Company } & 6,500 & \text { November 5 } \\ \text { Simrill Company } & 12,000 & \text { December 3 } \end{array} $$ a. Determine the number of days past due for each of the preceding accounts. b. Complete the aging-of-receivables schedule by including the omitted accounts.

The following selected transactions were completed by Cactus Co., a supplier of velcro for clothing: 2007 Dec. 13. Received from Lady Ann's Co., on account, a \(\$ 60,000,90\)-day, \(9 \%\) note dated December \(13 .\) 31\. Recorded an adjusting entry for accrued interest on the note of December \(13 .\) 2008 Mar. 12. Received payment of note and interest from Lady Ann's Co. Journalize the transactions.
See all solutions

Recommended explanations on Math Textbooks

Decision Maths

Read Explanation

Statistics

Read Explanation

Applied Mathematics

Read Explanation

Probability and Statistics

Read Explanation

Mechanics Maths

Read Explanation

Calculus

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.