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 make to write off uncollectable accounts or to estimate bad debts. The relevant data are as follows:
- Write-offs of uncollectable accounts during the year $10,500
- Net credit sales $650,000
- Estimated percentage of net credit sales that will be uncollectable 2%
Required:
Compute net income under each of the two alternatives. Does Rideaway have a choice as to which method to sue? If so, should it base its choice on which method will result in the higher net income? Explain