Question: At the beginning of 2012, Brad's Heating & Air (BHA) has a balance of $25,000 in accounts receivable. Because BHA is a privately owned company, the company has used only the direct write-off method to account for uncollectible accounts. However, at the end of 2012, BHA wishes to obtain a loan at the local bank, which requires the preparation of proper financial statements. This means that BHA now will need to use the allowance method. The following transactions occur during 2012 and 2013.
a. During 2012, install air conditioning systems on account, $180,000.
b. During 2012, collect $175,000 from customers on account.
c. At the end of 2012, estimate that uncollectible accounts total 20% of ending accounts receivable.
d. In 2013, customers' accounts totaling $7,000 are written off as uncollectible.
Required: 1. Record each transaction using the allowance method.
2. Record each transaction using the direct write-off method.
3. Calculate the difference in net income (before taxes) in 2012 and 2013 between the two methods.