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 decided 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?

Short answer

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

Step-by-step solution

Meaning of Bad debt expense

Bad debt expenses refer to an unfortunate cost in a business for giving credit to customers. In other words, bad debt expenses are a part of sales expenses.

Explanation to report as the cumulative effect of changing estimated bad debt rate.

Vandross would not report any cumulative effect because changes in the estimate would not be handled retrospectively. Only in the year 2017, the cumulative effect of changing the estimated bad debt will be reported.

In 2017, the allowance for doubtful debts and bad debts expense will increase by $120,000. Hence the cumulative effect comes out to be $0 due to a change in the estimate.