Brief Exercise 4-7 Cullumber Company has recorded bad debt expense in the past a

Question

Brief Exercise 4-7 Cullumber Company has recorded bad debt expense in the past at a rate of 1.5% of accounts receivable, based on an aging analysis. In 2017, Cul!umber decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $383,400 instead of $296,300. In 2017, bad debt expense will be $124,000 instead of $91,500. If Cu!lumber's tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate? (Do not leave any answer field blank. Enter O for amounts. The cumulative effect of changing the estimated bad debt rate g

Explanation / Answer

Answer for question no.4.7:

Increase in bad debt expense cumulatively due to increase in new rate

=383400-296300

=$87,100.

Applicable tax rate=30%.

As this is an allowable expense, the income tax savings would result from the increased expense to the extent of 30% on the increased expense.

So, after tax cumulative impact is $87,100*(1-.30)

=$60,970.

So, the cumulative effect of changing the estimated bad debt rate=$60,970.

Answer for question no.4-9:

Particulars Amount Retained earnings at the beginning of the period 677300 Net income during the year 1598100 Total 2275400 Minus: Dividends paid 75700 Balance at the end of the year 2199700

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