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Emily Dickinson Corporation - Bad Debt

(Bad-Debt Reporting) The chief accountant for Emily Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date Customer Amount
31-Mar E. L. Masters Company $7,800
30-Jun Stephen Crane Associates 6,700
30-Sep Amy Lowell's Dress Shop 7,000
31-Dec R. Frost, Inc. 9,830

Emily Dickinson Corporation 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 Emily Dickinson Corporation's sales are on a 30-day credit basis. Sales for the current year total $2,200,000, and research has determined that bad debt losses approximate 2% of sales.

(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-sales approach?

Solution Preview

(Bad-Debt Reporting) The chief accountant for Emily Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date Customer Amount
31-Mar E. L. Masters Company $7,800
30-Jun Stephen Crane Associates 6,700
30-Sep Amy Lowell's Dress Shop 7,000
31-Dec R. Frost, Inc. 9,830

Emily Dickinson ...

Solution Summary

This solution is comprised of a detailed explanation to answer whether you agree or disagree with Dickinson's policy concerning recognition of bad debt expense or not and calculate by what amount would net income differ if bad debt expense was computed using the percentage-of-sales approach.

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