Is this prior-period adjustment an error or a change in an accounting estimate?

Yandoit Ltd manufactures and sells women’s apparel for cash or on credit. On 30

 

June 2017, based on previous experience, Yandoit Ltd estimated bad and doubtful

debts expense equal to 3% of sales. The balance of the provision for doubtful

debts expense on 30 June 2017 is $130 000. However, in the second half of the

2017 financial year, customers unable to pay their accounts gave rise to a rate of

5% of sales – that is, the allowance for doubtful debts was understated by $86 667.

As economic conditions are forecast to deteriorate in the future, the trend towards

an increasing number of bad debts appears to be permanent. Consequently, bad

and doubtful debts expense is estimated to be 5% of sales for the year ended 30

June 2018. Sales for the period are $6 million. Profit for 2018 is estimated to be

$400 000.

(a) Is this prior-period adjustment an error or a change in an accounting estimate?

Explain.

(b) Prepare general journal entries, if any, for the year ended 30 June 2018 to account

for these events in accordance with AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

(c) What disclosures, if any, would be required by AASB 108 ‘Accounting Policies,

Changes in Accounting Estimates and Errors’?

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