Innerkip Ltd. (Innerkip) uses the percent age-of-credit-sales method of estimating the bad debt expense. Since 2014, Innerkip has used too low a percentage in calculating the bad debt expense each year. In 2018, management realized the error and decided to make an adjusting entry to correct it.
Credit sales every year from 2014 through 2018 were $500,000. Innerkip determined the bad debt expense using 2 percent of revenue each year. Management decides it will use 2.3 percent beginning in 2018 (and should have done since 2014). Innerkip has written off $11,500 of accounts receivable each year from 2014 through 2018. The balance in the allowance account on January 1, 2014 (the first day of Innerkip's fiscal year) was $11,500.
a. What bad debt expense did Innerkip record in each year from 2014 to 2018?
b. What was the effect on net income each year of using too low a bad debt expense estimate?
c. What was the balance in the allowance account at the end of each year?
d. What effect does correcting the error have on net income in 2018?
e. Prepare the journal entry that Innerkip would make in 2018 to correct the error and leave an appropriate balance in the allowance account. Assume the adjusting entry to correct the error is made after the entry to record the 2018 bad debt expense.