Tamarisk Company has recorded bad debt expense in the past a

Tamarisk Company has recorded bad debt expense in the past at a rate of 1.5% of accounts receivable, based on an aging analysis. In 2017, Tamarisk 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 Tamarisk\'s tax rate is 26%, what amount should it report as the cumulative effect of changing the estimated bad debt rate? (Do not leave any answer field blank. Enter O for amounts.) The cumulative effect of changing the estimated bad debt rate s

Solution

IAS 8 says that the changes in accounting policies such as specific principle, convention, base etc and period errors are generally retrospectively accounted i.e. adjustment for the previous will be needed.

However, for change in estimates such as reassessment of future benefits and obligations are recognized prospectively i.e. in the period of change and in future if required.

Since the change in the bad debt rate is the change in estimate, therefore it will affect the period in which change took place i.e. 2017 and in future.

Hence the cumulative effect of the change in bad debt rate will be $0.