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

Monty 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, Monty decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $385,200 instead of $289,000. In 2017, bad debt expense will be $121,200 instead of $95,720. If Monty’s tax rate is 29%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

What is the cumulative effect of changing the estimated bad debt rate?
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Answer #1

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 1½ % will be shown only for 2017.

Increased bad debt expense in 2017 will be 121,200 when 2% rate was used.

So bad debt expense will increase by 121,200 and Allowance for doubtful accounts will increase by 121,200 in 2017.

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

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