Change in Accounting Estimate
Albrecht Inc. began business in 2005. An examination of the company’s allowance for bad debts account reveals the following.
|
|
Estimated Bad Debts |
Actual Bad Debts |
|
2005 |
$11,000 |
$4,500 |
|
2006 |
13,000 |
6,800 |
|
2007 |
16,500 |
8,950 |
|
2008 |
No adjustment yet |
9,500 |
In the past, the company has estimated that 3% of credit sales would be uncollectible. The accountant for Albrecht has determined that the percentage used in estimating bad debts has been inappropriate. She would like to revise the estimate downward to 1.5%. The company president has stated that if the previous estimates of bad debt expense were incorrect, the financial statements should be restated using the more accurate estimate.
1. Assuming that credit sales for 2008 are $650,000, provide the adjusting entry to record bad debt expense for the year.
2. What catch up entry, if any, would be made to correct the inaccurate estimates for previous years?
3. How would you respond to the president’s request to restate the prior years’ financial statements?