Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements?

A) $500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach.

B) $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet.

C) $500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax).

D) $500,000 of expense and $500,000 as an unusual loss in the income statement.

Question

Dennis Blankenship

Business

9 October, 18:55

Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements?

A) $500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach.

B) $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet.

C) $500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax).

D) $500,000 of expense and $500,000 as an unusual loss in the income statement.

+2

Answers (1)

Know the Answer?

Houston Norris · Answer 1

The answer is B

Explanation:

The detailed accounting entry will be:

Dr Bad Debt Expenses $500,000

Cr Provision for account receivable $500,000

(to record estimation of bad debt over credit sales)

From the detailed entry, the Dr side will go into Income Statement as a type of expense and the Cr side will go into Balance Sheet as contra asset.

Answer A is not right because the re-estimation of bad-debt percentage is not a change in accounting principle

Answer C is not right because the re-estimation of bad-debt percentage in this case does not require adjustment in the beginning balance of retained earning

Answer D is not right because it is not complete (it does not mention the increase in the contra asset account Provision for account receivable) and it duplicate the record of bad debt expenses (it has been recorded as expense and unusual loss at the same time).