Question

Sage 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, Sage decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $387,800 instead of $299,000. In 2017, bad debt expense will be $122,400 instead of $91,130. If Sage’s tax rate is 27%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Answer 1

Answer:

The cumulative effect of the change in the rate of bad debt will, therefore, be $0.

Explanation:

According to International Accounting Standard 8( IAS 8), any changes in accounting policies (convention, base, principle, etcetera) and period errors are accounted for retrospectively. This means that previous period figures will have to be adjusted.

On the other hand, any changes in estimates are recognized prospectively. This includes reassessment of future benefits and obligations.

From the given information, the change in the rate of bad debt amounts to a change in estimate. As such, the change in this rate will affect the period in which the change took place. That is, 2017 and in future.

The cumulative effect of the change in the rate of bad debt will, therefore, be $0.