07 Feb Comparison of the Direct Write-Off and Allowance M
Comparison of the Direct Write-Off and Allowance Methods of Accounting for Bad DebtsIn its first year of business, Rideaway Bikes has net income of $145,000, exclusive of any adjustmentfor bad debt expense. The president of the company has asked you to calculate net income undereach of two alternatives of accounting for bad debts: the direct write-off method and the allowancemethod. 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:RequiredCompute net income under each of the two alternatives. Does Rideaway have a choice as towhich method to use? If so, should it base its choice on which method will result in the highernet income? (Ignore income taxes.) Explain.
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