Question

Trilby Inc. (Trilby) uses the percentage-of-credit-sales method for estimating its bad debt expense. The percentage Trilby uses is based on historical information. Trilby's management hasn't revised the percentage for several years, a period during which a number of en vironmental and business factors have changed. Trilby's management recently realized that over the last three years the percentage of credit sales the company has been using is too high. As a result, the balance in allowance for uncollectible accounts is $53,000 higher than it would have been had a better estimate of bad debts been used each year.

Required:
a. Prepare the adjusting journal entry that Trilby must make to have an appropriate balance in allowance for uncollectible accounts.
b. What is the effect of the error in estimating bad debts in each of the years the error was made? What is the effect of the adjusting entry on net income? Answer the question by comparing the reported net income with what net income would have been had the error not been made and the adjusting entry not required.
c. What is the impact of this error and the adjusting entry on the users of the financial statements? Explain fully.



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  • CreatedFebruary 26, 2015
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