Question

Vandross Company has recorded bad debt expense in the past at a rate of 1½% of accounts receivable, based on an aging analysis. In 2017, Vandross decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2017, bad debt expense will be $120,000 instead of $90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Answer 1

Solution:

Given data:

*Bad debts expenses @ of 1.5% of Accounts receivables.

*In 2017, Vandross decides to increase its estimate to 2%

*​If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2017, bad debt expense will be $120,000 instead of $90,000

* vandross tax rate = 30%

Calculation of Cumulative effect of changing the estimated Bad debt rate -

Changes in Accounting Estimates are appeared for the period of change and future period if the change influences future period moreover. These changes are not conveyed back to modify earlier years.

cumulative effect of changing the estimated bad debt rate to 2% from 1½ % will be shown only for 2017.

The Increased bad debt expense in 2017 will be 120,000 when 2% rate was used..

So, bad debt expense will increase by 120,000 and Allowance for doubtful accounts will increase by 120,000 in 2017.

But the cumulative effect of changing the estimated bad debt rate will be 0.