Pauline€™s Pottery has always used the direct write-off method to account for uncollectibles. The company€™s revenues, bad-debt write offs, and year-end receivables for the most recent year follow:

The business is applying for a bank loan, and the loan officer requires figures based on the allowance method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.
Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2011 if Pauline€™s Pottery were to use the allowance method for bad debts? Please use the percentage-of-sales method.
2. How much of the receivables balance at the end of 2011 does Pauline€™s Pottery actually expect to collect? (Disregard beginning account balances for the purpose of this question.)
3. Compute these amounts, and then explain for Pauline€™s Pottery why net income is more or less using the allowance method versus the direct write-off method foruncollectibles.

Transcribed Image Text:

Receivables at Year-End Year Revenues Write-Offs S150,000 2011 $3,900 $14,000