The chief accountant for Dollywood Corporation provides you withthe following li

Question

The chief accountant for Dollywood Corporation provides you withthe following list of accounts receivable written off in thecurrent year:

Date                   Customer                                  Amount

March31           E.L. MastersCompany             $7,800
June30               HockingAssociates              9700
September 30      Amy Lowell's DressShop      7000
December 31       R. Bronson,Inc.                      9830

    Dollywood Corporation follows the policy ofdebiting Bad Debt Expense as accounts are written off. The chiefaccountant maintains that this procedure is appropriate forfinancial statement purposes because the Internal Revenue Servicewill not accept other methods for recognizing bad debts.
    All of Dollywood Corp.'s sales are on a 30-daycredit basis. Sales for the current year total $2,400,000, andresearch has determined that bad debt losses approximate 2% ofsales.

Instructions:
(b) By what amount would net income differ if bad debtexpense was computed using the percentage of-sales approach?

Explanation / Answer

(b)

Bad Debt Expense – 2% of sales - $44,000(2,200,000*2%)

Bad Debt Expense (Direct Write Off) - $31,330 ($7800 + $6700 +$7000 + $9830)

Net Income would be $12,670 lower under the percentage –of–sales method

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