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Direct Write-Off versus Allowance Method

The vice president for Tres Corporation provides you with the following list of accounts receivable written off in the current year. (These accounts were recognized as bad debt expense
at the time they were written off; i.e., the company was using the direct write-off method.)

Date Customer Amount
March 30 Rasmussen Company $12,000
July 31 Dodge Company 7,500
September 30 Larsen Company 10,000
December 31 Peterson Company 12,000

Tres Corporation's sales are all on a n/30 credit basis. Sales for the current year total $3,600,000,
and analysis has indicated that uncollectible receivable losses historically approximate 1.5% of
sales.
1. Do you agree or disagree with Tres Corporation's policy concerning recognition of bad debt
expense? Why or why not?

2. If Tres were to use the percentage of sales method for recording bad debt expense, by how
much would income before income taxes change for the current year?

Solution Preview

The vice president for Tres Corporation provides you with the following list of accounts receivable written off in the current year. (These accounts were recognized as bad debt expense
at the time they were written off; i.e., the company was using the direct write-off method.)

Date Customer Amount
March 30 Rasmussen Company $12,000
July 31 Dodge Company 7,500
September 30 Larsen Company 10,000
December 31 Peterson Company 12,000

Tres Corporation's sales ...

Solution Summary

Briefly answers the questions, with calculations as required.

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