Vandross Company has recorded bad debt expense in the past at a rate of 1.5% of
ID: 2489105 • Letter: V
Question
Vandross Company has recorded bad debt expense in the past at a rate of 1.5% of net sales. In 2014, 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 $398,750 instead of $291,370. In 2014, bad debt expense will be $125,590 instead of $92,740. If Vandross's tax rate is 28%, what amount should it report as the cumulative effect of changing the estimated bad debt rate? The cumulative effect of changing the estimated bad debt rateExplanation / Answer
Solution:
Answer is 0. Because the change in percentage is treated as a change in estimate, there is no cumulative adjustment at the beginning of 2014. However, the balance in the allowance for bad debts account should be analyzed to determine whether net accounts receivable are reported at their net realizable value. In this problem, the balance in the allowance account may be too high because of the overestimate of bad debt expense in past years, suggesting the need for a special reduction in bad debt expense this year to adjust the balance to the correct amount.
Vandross would not report any cumulative effect because a change in estimate is not handled retrospectively. Vandross would report bad debt expense of $125,590 in 2014.
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