My teacher doesn't teach us anything in class and I'm having a lot of trouble figuring out some of my homework problems. If you could help me and show me how you were able to come to the answer for this problem I would greatly appriciate it!


Vandross Company has recorded bad debt expense in the past at a rate of 1.5% of net sales. In 2010, Vandross decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $389,150 instead of $290,600. In 2010, bad debt expense will be $125,860 instead of $93,570. If Vandross's tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Answer is 0. Because the change in percentage is treated as a change in estimate, there is no cumulative adjustment at the beginning of 2010. However, the balance in the allowance for bad debts account should be analyzed to determine whether net accounts receivable are reported at their net realizable value. In this problem, the balance in the allowance account may be too high because of the overestimate of bad debt expense in past years, suggesting the need for a special reduction in bad debt expense this year to adjust the balance to the correct amount.

In this problem they are going from 1.5 to 2% isn't that an increase in the expense from prior years?

Changes in estimates are not done retrospectively.