Direct Write-off of Accounts Receivable Folley Corporation records uncollectible accounts receivable as bad debt expense at the time it is learned they cannot be collected.

Folley Corporation started business on January 1, 2000, and had credit sales of $180,000 in 2000, $135,000 of which was collected by year-end, and $3,000 of which was written off as uncollectible.

Credit sales in 2001 were $320,000 and cash collections from 2001 sales were $175,000. In addition, Folley collected

$34,500 of receivables from 2000, and the remainder of 2000 receivables were written off as bad debt expense.

a. Compute Folley’s net income for 2000 and 2001, assuming operating expenses (excluding bad debt expense) of

$40,000 and $90,000, respectively.

b. Evaluate the accuracy of the amounts reported as net income for each of the years by comparing them to a more acceptable treatment of bad debts. If you were evaluating the company’s operations as a potential investor, which method of accounting for uncollectible accounts would you prefer the company to use? Explain.