Question

The chief accountant for Novak 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 $6,200 June 30 Stephen Crane Associates 5,300 5,600 September 30 Amy Lowell's Dress Shop December 31 R. Frost, Inc. 7,800 Novak 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 Novak'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 $61,600 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance) (b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach? Assume that accounts written off were for sales in a prior year. Net income would be $ under the percentage-of-receivables approach

Answer 1

Net income would be $ 17,508 higher under the percentage of receivables approach.

Bad debt under direct write off. $ 24,900

Less: Bad debts under % of receivables approach. $ 7,392

($ 61,600 * 12%)

Bed debts Expense excess recognized. $ 17,508