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    Direct Write-Off versus Allowance Method

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    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?

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    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 ...

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    Briefly answers the questions, with calculations as required.

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