Exercise 7-10

The chief accountant for Monty Corporation provides you with the following list of accounts receivable written off in the current year.

Date\Customer/Amoun

March 31 E. L. Masters Company $7,730

June 30 Stephen Crane Associates 8,470

September 30 Amy Lowell's Dress Shop 6,320

December 31 R. Frost, Inc.9,036

Monty 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 Monty's sales are on a30-day credit basis. Sales for the current year total $2,221,400. The balance in Accounts Receivable at year-end is $72,300 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).

(b)By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?Assume that accounts written off were for sales in a prior year.

Net income would be $

higher

lower

under the percentage-of-receivables approach.