Question

The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable that were written off in the current year: Date Customer Mar. 31 Eli Masters Ltd. June 30 Crane Associates Sept. 30 Annie Lowell's Dress Shop Dec. 31 Vahik Uzerian Amount $7,700 6,800 12,000 6,830 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. All of Dickinson Corporation's sales are on a 30-day credit basis, and the accounts written off all related to current year sales. Sales for the year total $3.20 million, and your research suggests that bad debt losses approximate 2% of sales. (b) By what amount would net income differ if bad debt expense was calculated using the allowance method and percentage-of-sales approach? (Enter change in net income as a positive amount.) Bad debt expense using allowance method and percentage-of-sales approach Bad debt expense using the direct write off method Difference in net income

Answer 1

Bad debt expense using allowance method and percentage-of-sales approach	$64,000
Bad debt expense using the direct write off method	$33,330
Difference in net income	$30,670

Calculations:

i.Bad debt expense using allowance method:

Bad debt expense = Credit sales x Estimated % of bad debt expense on credit sales

= $3,200,000 x 2%

= $64,000

ii.Bad debt expense using the direct write off method:

Customer	Amount
Eli Master Ltd.	$7,700
Crane Associates	$6,800
Anni Lowell's Dress Shop	$12,000
Vahk Uzerian	$6,830
Bad debt expense	$33,330