Question

Marigold 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, Marigold decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $437,500 instead of $328,125. In 2020, bad debt expense will be $123,200 instead of $92,400. If Marigold’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

$enter the cumulative effect of changing the estimated bad debt rate in dollars

Answer 1

As per Internation Accounting standards IAS 8 on changes in accounting policies and accounting estimates, for change in accounting estimates such as rate of bad debt expense, the change must be recorded prospectively and not retrospectively because certain circumstances would have occured now which demand change in rate of bad debt expense. Such circumstances would not have existed earlier when a different bad debt expense rate was applied.

So, in this case, the bad debt expense to be recorded in 2020 will be $123,200 and the cumulative effect of changing the estimated bad debt rate to 2% will be $0.