Betteroff Company was incorporated on 1 January 20X3. In the past, it has not provided an allowance for doubtful accounts. Instead, uncollectible accounts were expensed when written off and recoveries were credited to bad debt expense when collected. Accounts were written off if they were outstanding for more than four months.

In December 20X5, the company decided to change its accounting policy to account for bad debts as a percentage of credit sales, in compliance with GAAP and with industry practice. Statistics for the past three years are summarized as follows:

Accounts receivable at 31 December \(20 \times 5\) were \(\$ 50,000\) after write-offs but before any allowance for doubtful accounts.

Required:
1. How should the change in accounting policy be accounted for?
2. Prepare the journal entry to reflect the change in accounting policy and to adjust 20X5 bad debt expense. State your assumptions and show your supporting calculations, in arriving at a percentage rate for bad debts. Disregard income tax.
Source: Reproduced with permission from CGA-Canada.

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Accounts Written off and Year of Sale Recoveries and Year of Sale Year Credit Sales 20X3 20X4 20X5 20X3 20X4 20X3 $100,000 $550 $10 20X4 150,000 650 $750 30 $20 20X5 225,000 - 900 $950 40