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Chapter 4: 7BE (page 181)

Vandross Company has recorded bad debt expense in the past at a rate of 1陆% 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鈥檚 tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Short Answer

Expert verified

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

Step by step solution

01

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.

02

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.

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Most popular questions from this chapter

Question: What are the two ways that other comprehensive income may be displayed (reported)?

Presented below is information related to Viel Company on December 31, 2017, the end of its first year of operations.

Sales revenue $310,000

Cost of goods sold 140,000

Selling and administrative expenses 50,000

Gain on sale of plant assets 30,000

Unrealized gain on non-trading equity securities 10,000

Interest expense 6,000

Loss on discontinued operations 12,000

Allocation to non-controlling interest 40,000

Dividends declared and paid 5,000

Instructions

Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance on December 31, 2017. (Ignore income taxes.)

What are the advantages and disadvantages of the single-step income statement?

Question: At December 31, 2016, Shiga Naoya Corporation had the following stock outstanding.

10% cumulative preferred stock, \(100 par, 107,500 shares \)10,750,000

Common stock, \(5 par, 4,000,000 shares 20,000,000

During 2017, Shiga Naoya did not issue any additional common stock. The following also occurred during 2017.

Income from continuing operations before taxes \)23,650,000

Discontinued operations (loss before taxes) \(3,225,000

Preferred dividends declared \)1,075,000

Common dividends declared $2,200,000

Effective tax rate 35%

Instructions

Compute earnings per share data as it should appear in the 2017 income statement of Shiga Naoya Corporation. (Round to two decimal places.)

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?
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