The chief accountant for Dickinson Corporation provides you with the following l

Question

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

Date

Customer

Amount

Dickinson Corporation 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 Corporation’s sales are on a 30-day credit basis. Sales for the current year total $2,223,300, and research has determined that bad debt losses approximate 3% of sales.

(b)

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

Date

Customer

Amount

March 31 E. L. Masters Company $8,230 June 30 Stephen Crane Associates 8,710 September 30 Amy Lowell’s Dress Shop 7,100 December 31 R. Frost, Inc. 8,100

Explanation / Answer

A) Total Bad debts as per current method: ($8320+$8710+$7100+$8100)= $32,230

B) Bad debts as per new method= $2,223,300*3%=$66,699

C) Net income differ under the percentage of sales approach

= $32,230-$66,699

=$34,469

So, Net income will reduce by new method by $34,469

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