Exercise 7-1 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 $145,000, exclusive of any adjustment for bad debts expense. The president of the company has asked you to calculate net income under each of two alternatives of accounting for bad debts: the direct write-off method and the allowance method. The president would like to use the method that will result in the higher net income. So far, no adjustments have been made to write off uncollectible accounts or to estimate bad debts. The relevant data are as follows:

Required:

The net income under the direct write-off method would be $ based on the net income as given reduced by the amount of write-offs.

The net income under the allowance method would be $ based on the net income as given reduced by the estimate of uncollectible accounts calculated by multiplying the estimated percentage by net sales.

Write-offs of uncollectible accounts during the year $10,500 Net credit sales $650,00 Estimated percentage of net credit sales that will be uncollectible 2%