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Chapter 4: 7BE (page 181)

Vandross Company has recorded bad debt expense in the past at a rate of 1½% 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’s 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

(Multiple-Step Statement) The following balances were taken from the books of Alonzo Corp. on December 31, 2017.

Interest revenue \(86,000 Accumulated depreciation equipment \)40,000

Cash \(51,000 Accumulated depreciation—buildings \)28,000

Sales revenue \(1,380,000 Notes receivable \)155,000

Accounts receivable \(150,000 Selling expenses \)194,000

Prepaid insurance \(20,000 Accounts payable \)170,000

Sales returns and allowances \(150,000 Bonds payable \)100,000

Allowance for doubtful accounts \(7,000 Administrative and general expense \)97,000

Sales discounts \(45,000 Accrued liabilities \)32,000

Land \(100,000 Interest expense \)60,000

Equipment \(200,000 Notes payable \)100,000

Buildings \(140,000 Loss from earthquake damage \)150,000

Cost of goods sold \(621,000 Common stock \)500,000

Retained earnings $21,000

Assume the total effective tax rate on all items is 34%.

Instructions

Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.

The non-controlling interest section of the income statement is:

(a) required under GAAP but not under IFRS.

(b) required under IFRS but not under GAAP.

(c) required under IFRS and GAAP.

(d) not reported under GAAP or IFRS.

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

(b) What are P&G’s primary revenue sources?

(c) Compute P&G’s gross profit for each of the years 2012–2014. Explain why gross profit decreased in 2014.

(d) Why does P&G make a distinction between operating and nonoperating revenue?

(e) What financial ratios did P&G choose to report in its “Financial Summary” section covering the years 2009–2014?

What effect does intraperiod tax allocation have on reported net income?

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

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