Effect of Doubtful Accounts on Net Income

During its first year of operations, Fisher Plumbing Supply Co. had sales of $580,000, wrote off $6,000 of accounts as uncollectible by decreasing Accounts Receivable directly, and reported net income of $63,800. The company estimated that $10,150 of accounts receivable would be uncollectible.

Assume that during the second year of operations Fisher Plumbing Supply Co. had sales of $696,000, wrote off $7,200 of accounts as uncollectible by decreasing Accounts Receivable directly, and reported net income of $69,500.

a. Determine what net income would have been in the second year if the allowance method had been used and uncollectible accounts receivable were estimated to be $12,180 in the second year.

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.