Exercise # 4 The chief accountant for Dollywood Corporation provides you with th
ID: 2567813 • Letter: E
Question
Exercise # 4 The chief accountant for Dollywood Corporation provides you with the following list of accounts receivable written off in the current year. Date Customer Amount March 31 E. L. Masters Company $7,800 9,700 September 30 Amy Lowell's Dress Shop 7,000 9,830 June 30 Hocking Associates December 31 R. Bronson, Inc. Dollywood 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 Dollywood Corporation's sales are on a 30-day credit basis. Sales for the current year total $2,400,000, and research has determined that bad debt losses approximate 2% of sales. Instructions (a) Do you agree or disagree with Dollywood's policy concerning recognition of bad (b) By what amount would net income differ if bad debt expense was computed using debt expense? Why or why not? (5 pts.) the percentage-of-sales approach? (5 pts.)Explanation / Answer
a) I disagree with Dollywood's policy of recognition of bad debts at the point of time they are written off in the books. This procedure will, in some cases, fail to relate bad debts to the period during which the relevant sale was made. A sale may occur in one period, but, may be written off in the next period, in which case the current method of accounting for bad debts will not satisfy the matching principle. Hence, an expensing system which matches, for each period, the sales made with the relevant bad debts, eventhough on an estimated basis, is required. The % of sales approach could be adopted. b) Bad debts under % of sales method = 2400000*2% = $ 48,000 Bad debts under write-off method = 7800+9700+7000+9830 = $ 34,330 Difference $ 13,670 NET INCOME WOULD DECREASE BY $13,670, if the percentage of sales method is adopted.
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