Sarasota Company has recorded bad debt expense in the past at a rate of 1.5% of

Question

Sarasota 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, Sarasota decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $383,900 instead of $297,900. In 2017, bad debt expense will be $138,300 instead of $96,810. If Sarasota’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 0 for amounts.) The cumulative effect of changing the estimated bad debt rate

Explanation / Answer

Sarasota Company would not report any cumulative effect because a change in estimate is not handled retrospectively. There will be only prospective effect in the accounts.

Sarasota Company would report bad debt expense of $138,300 in 2017. i.e as per the new estimated rate.

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