A company uses the aging method to estimate bad debt expense. Its tax rate is 30%. After issuing its 2009 financial statements, the firm discovered that it failed to write off $50,000 in receivables that were determined to be uncollectible in 2009. As a result of this error, net income was:

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Since the $50,000 in uncollectible receivables were not written off in 2009, the aging method used to estimate bad debt expense would have overstated the amount of bad debt expense and thus understated net income. Therefore, the error resulted in net income being understated, and the amount by which it was understated cannot be determined without additional information. The tax rate is not relevant to the calculation of the effect on net income.

A Company Uses the Aging Method to Estimate Bad Debt