Question

Lincoln uses income statement approach to estimate uncollectible accounts. During the year of 2019, total sales amount to $400,000 of which 37.5% is cash sales.

Past experience indicate that 1.5% of credit sales are probable to be uncollectible. Prior to adjustment, the allowance for doubtful accounts has a credit balance of $1,500 at December 31, 2019. Total amount of accounts receivable, on the other hand, amount to $267,000 as of December 31, 2019.

Instructions (25 points):

a. Compute the uncollectible accounts expense for the year of 2019 and journalize the adjusting entry at December 31, 2019.

b. Compute the balance of allowance for doubtful accounts after adjustment at December 31, 2019.

c. Compute the amount of account receivable that should be reported in the balance sheet at December 31, 2019.

Answer 1

a)

Total sales = $400,000

Cash sales = 37.5% of total sales

= 400,000 x 37.5%

= $150,000

Credit sales = Total sales - Cash sales

= 400,000 - 150,000

= $250,000

Uncollectible accounts expense = 1.5% of credit sales

= 250,000 x 1.5%

= $3,750

Journal

December 31, 2019	Bad debt expense	3,750
	Allowance for doubtful accounts		3,750

b)

Balance of allowance for doubtful accounts after adjustment at December 31, 2019 = Allowance for doubtful accounts, existing + Bad debt expense

= 1,500 + 3,750

= $5,250

c)

Amount of account receivable that should be reported in the balance sheet at December 31, 2019 = Accounts receivables - Allowance for doubtful accounts

= 267,000 - 5,250

= $261,750