X has recorded bad debt expense in the past at a rate of 1.5% of accounts receivable, based on an aging analysis. In 2017, X decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $387,800 instead of $289,900. In 2017, bad debt expense will be $131,800 instead of $98,130. If X’s tax rate is 26%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?
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To determine the cumulative effect of changing the estimated bad debt rate, we need to calculate the difference between the actual cumulative bad debt expense and the hypothetical cumulative bad debt expense using the new rate.
Let's break down the information given:
Past bad debt expense rate: 1.5% of accounts receivable
New bad debt expense rate: 2% of accounts receivable
Actual cumulative bad debt expense:
In prior years: $289,900
In 2017: $98,130
Hypothetical cumulative bad debt expense:
In prior years (using the new rate): $387,800
In 2017 (using the new rate): $131,800
To find the cumulative effect, we need to find the difference between the actual and hypothetical cumulative bad debt expense for both prior years and 2017.
Cumulative effect on bad debt expense in prior years:
$387,800 - $289,900 = $97,900
Cumulative effect on bad debt expense in 2017:
$131,800 - $98,130 = $33,670
Now, we need to calculate the cumulative effect on income tax expense by multiplying the cumulative effect on bad debt expense by the tax rate.
Cumulative effect on income tax expense in prior years:
$97,900 * 26% = $25,454
Cumulative effect on income tax expense in 2017:
$33,670 * 26% = $8,748.20
Therefore, X should report a cumulative effect of $25,454 for the change in the estimated bad debt rate.