(The effect of errors on net income, LO 3) Capstick Ltd. (Capstick) uses the percentage-of-credit-sales method of estimating the bad debt expense. Since 2000 Capstick has used too low a percentage in calculating the bad debt expense each year.

In 2004 management realized the error and decided to make an adjusting entry to correct it. Credit sales every year from 2000 through 2004 were $500,000. Capstick determined the bad debt expense using 2% of net income as the basis of its estimate each year. Management decides it will use 2.3% beginning in 2005. Capstick has written off $11,500 of accounts receivable each year from 2000 through 2004. The balance in the allowance account on January 1, 2000 (the first day of Capstick’s fiscal year) was $11,500.

a. What bad debt expense did Capstick record in each year from 2000 to 2004?

b. What was the effect on net income each year of using too low a bad debt expense estimate?

c. What was the balance in the allowance account at the end of each year?

d. What effect does correcting the error have on net income in 2004?

e. Prepare the journal entry that Capstick would make in 2004 to correct the error and leave an appropriate balance in the allowance account. Assume the adjusting entry to correct the error is made after the entry to record the 2004 bad debt expense.