1. Comparison of the Direct Write-Off and Allowance Methods of Accounting for Bad Debts In its first year of business, Rideaway Bikes has net income of $122,000, exclusive of any adjustment for bad debts expense. So far, no adjustments have been made to write off uncollectible accounts or to estimate bad debts. The relevant data are as follows: Write-offs of uncollectible accounts during the year $10,500

Net credit sales $650,000

Estimated percentage of net credit sales that will be uncollectible 2%

Required:

Under the direct write-off method, net income is $ ___________and under the allowance method, net income is_________ . The direct write-off method results in the higher net income but the method that should be used is the allowance method because this is the preferred method under accounting standards because it follows the matching principle . The direct write-off method should only be used if the amount of bad debts is immaterial .