Question

Bad-Debt Reporting

The Chief Accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date Customer Amount

Mar 31 E.L Masters $7,800

Jun 30 Stephen Crane $6,700

Sept 30 Amy Lowell's $7,000

Dec 31 R Frost, Inc. $9,830

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The Chief Accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson's sales are on a 30-day credit basis. Sales for the current year total $2,200,000. The balance in Accounts Receivable at year-end is $77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be not collectible (assume a zero balance in the allowance).

Instructions:

a.) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?

Answer 1

a.)

Calculation of difference in net income if bad debt expense was computed by using percentage-of-receivable approach:

Results of the formulas used in the above sheet are as follows:

So, the net income will increase by $22,090 if bad debts are recorded on the basis of the percentage-of-receivable approach.