McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company’s fiscal year, accounts receivable are analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2024, the company reported the following amounts:

In 2025, it was determined that $1,825,000 of year-end 2024 receivables had to be written off as uncollectible. This was due in part to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2025. Hughes owed McLaughlin $1,400,000. At the end of 2024, none of the Hughes receivable was considered uncollectible.

Required:
Should McLaughlin’s underestimation of bad debts be treated as an error correction (requiring retroactive restatement) or a change in estimate (and accounted for prospectively)? Describe the appropriate accounting treatment and required disclosures in the financial statements issued for the 2024 fiscal year.

Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net $10,850,000 (450,000) $10,400,000