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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.

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Answer:

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).

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