At the beginning of 2021, Brad’s Heating & Air (BHA) has a balance of $26,000 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 2021, 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 2021 and 2022. 1. During 2021, install air conditioning systems on account, $190,000.
2. During 2021, collect $185,000 from customers on account.
3. At the end of 2021, estimate that uncollectible accounts total 15% of ending accounts receivable.
4. In 2022, customers’ accounts totaling $8,000 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 2021 and 2022 between the two methods.