### Financial Analysis: Understanding Uncollectible Accounts**Scenario 5: Sampson’s Cosmetics International**In its first year of operations, Sampson’s Cosmetics International reported sales amounting to $3,250,000. The company used the direct write-off method to account for uncollectible accounts, writing off $27,800 as uncollectible. Consequently, the net income reported was $487,500.**Objective:**Determine the impact on net income if the allowance method had been applied, assuming the company estimated that 1% of sales would be uncollectible.**Calculation Process:**1. **Sales:** $3,250,0002. **Estimated Uncollectible (1% of Sales):** \[ \$3,250,000 \times 0.01 = \$32,500 \]3. **Comparison of Methods:** - **Direct Write-off Method:** Actual write-offs are $27,800. - **Allowance Method:** Estimated allowance is $32,500.4. **Adjustment in Net Income:** - With the allowance method, the estimated expense increases by $32,500 instead of the actual $27,800. - Increase in expense: \[ \$32,500 - \$27,800 = \$4,700 \]5. **Adjusted Net Income:** - Original Net Income: \$487,500 - Increased Expense Deduction: \$4,700 - Adjusted Net Income: \[ \$487,500 - \$4,700 = \$482,800 \]By applying the allowance method, the net income would have been $482,800, reflecting a more conservative approach to accounting for potential uncollectible accounts.---**Problems Section:**1. Review the select information for Bean Superstore and Legumes Plus (industry competitors).

Bad debts can be referred to as that portion of credit sales which cannot be recovered by the company. In other words, the bad debts are those accounts receivable on which the entity will not receive the amount due.The net income by using allowance method can be computed as follows: Particulars Amount ($) Net Income 487,500 Add: Uncollectible as per direct-write off method 27,800 515,300 Less: Uncollectible as per allowance method ($3,250,000 X 1%) (32,500) Net income 482,800 Hence, net income will be $482,800.

Business

Accounting

5. During its first year of operations, Sampson's Cosmetics International had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and re-ported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.

5. During its first year of operations, Sampson's Cosmetics International had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and re-ported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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