Question

E7-10 (L03) (Bad-Debt Reporting) The chief accountant for Dickinson 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

June 30 Stephen Crane Associates 6,700

September 30 Amy Lowell’s Dress Shop 7,000

December 31 R. Frost, Inc. 9,830

Dickinson 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’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 $77,000 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).

Instructions

(a) Do you agree or disagree with Dickinson’s policy concerning recognition of bad debt expense? Why or why not?

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables

approach?

Answer 1

(a) I agree with Dickinson's policy concerning recognition of bad debt expenses as the amount not received within the credit period of days after the sales cannot be recovered.It would be better to write off expenses when they are not recoverable as it shows the exact position of the receivables rather than on estimation basis.

(b)Actual Bad debts written off= 7800+6700+7000+9830 = 31330

Using Percentage of receivables approach

Receivable	%	Bad debts estimation
7800	12	936
6700	12	804
7000	12	840
9830	12	1180
77000	12	9240
		13,000

The bad debt expense would be $13,000 if it were calculated on the estimation basis which makes the net income increase by $18,330