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?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
The chief accountant for Dickinson Corporation provides you with the following list of
| 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
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?
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