The Ditmas Corp. uses the allowance method of recording bad debt expense. In 2017, it overestimated the amount of bad debt expense, and recorded an allowance that was too large. At the end of 2018, when it learns that more customers are paying than it expected, it will:
A) Change the reported expenses for 2017, and re-issue its 2017 reports
B) Report a lower 2018 bad debt expense than it would have if its 2017 estimate had been accurate
C) Report a higher 2018 bad debt expense than it would have if its 2017 estimate had been accurate
D) Ignore the incorrect estimate from 2017, and include only the bad debts related to 2018 sales in the 2018 income statement

Question

Quizplus · Accepted Answer

If the allowance was overestimated in 2017, it means that more bad debt expense was recorded than necessary, resulting in a lower net income for that year. In 2018, when it is discovered that more customers are paying than expected, it means that actual bad debt expense is lower than previously estimated. Therefore, the 2018 bad debt expense should be adjusted downwards since less bad debt is expected to be incurred. This is choice B. The 2017 reports do not need to be re-issued as the mistake does not affect the current year's financial statements, and the incorrect estimate from 2017 would have no impact on the 2018 income statement, so choice D is not applicable.