Question

Coronado Company has recorded bad debt expense in the past at a rate of 1.5% of accounts receivable, based on an aging analysis. In 2020, Coronado decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $380,300 instead of $285,225. In 2020, bad debt expense will be $108,400 instead of $81,300. If Coronado’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Answer 1

Answer:

The cumulative effect of changing the estimate for bad debt expenses is $0.

Explanation:

Changes in accounting estimates are shown for the period of change and future period if the change affects future period also. These changes are not carried back to adjust prior years.

The cumulative effect of changing the estimated bad debt rate to 2% from 1.5 % will be shown only for 2020.

Increased bad debt expense in 2020 will be $108,400 when 2% rate was used.

If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2020, bad debt expense will be $108,400 instead of $81,300.

Coronado’s tax rate = 30%  

So bad debt expense will increase by $108,400 and Allowance for doubtful accounts will increase by $108,400 in 2020.

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

Change in bad debt expenses estimate is not retrospective also tax will not change due to changes in estimate.

Therefore, The cumulative effect of changing the estimate for bad debt expenses is $0.