Question

On September 30, 2019 (the end of its fiscal year), Lufkin Corporation reported accounts receivable of $331,750 and an allowance for doubtful accounts of $16,700. During fiscal 2020, the following transactions occurred:

	Amount
Credit sales (terms, n/EOM)	$2,017,800
Collections on accounts receivable	1,956,000
Accounts receivable written off	16,200

On September 30, 2020, an aging of the accounts receivable balance indicated the following:

Age	Amount	Estimated Percentage Uncollectible
Under 30 days	$169,250	0.8%
30–90 days	100,000	1.6
91–180 days	55,900	5.0
181–360 days	38,200	15.0
Over 360 days	14,000	40.0
	$377,350

	Required:
1.	Prepare the journal entries necessary to record the credit sales, collections on account, write-off of accounts receivable, and bad debts expense for Lufkin for fiscal 2020.
2.	What are Lufkin’s September 30, 2020, balances in Accounts Receivable and in its Allowance for Doubtful Accounts, and how will they be disclosed on the September 30, 2020, balance sheet?
3.	Next Level Compute Lufkin’s receivables turnover in days, assuming a 365-day business year. What is your evaluation of its collection policies?

Answer 1

Account title Credit Requirement 1: Date Accounts receivable Sales revenue (To record credit sales) Debit 2,017,800 2,017,800 1,956,000 Cash Accounts receivable (To record collection on account) 1,956,000 16,200 Allowance for doubtful accounts Accounts receivable (To record the write off) 16,200 16,579 Bad debt expense Allowance for doubtful accounts (17,079-16,700+16,200) (To record the bad debt expense) 16,579

Age Under 30 days 30-90 days 91-180 days 181-360 days Over 360 days Total Amount $ 169,250 100,000 55,900 38,200 14,000 $ 377,350 Estimated Percentage Uncollectible 0.80% 1.60% 5% 15% 40% Estimated amount $ 1,354.00 $ 1,600.00 $ 2,795.00 $ 5,730.00 $ 5,600.00 $ 17,079.00

Requirement 2: Ending balance of accounts receivable -331,750+2,017,800-1,956,000-16,200 =377,350 Ending balance of allowance for doubtul accounts = 17,079 Lufkin Corporation Balance sheet (Partial) As of Sep. 30, 2020 Current assets: Accounts receivable Less: Allowance for doubtul accounts 377,350 -17,079 360,271

Requirement 3: Accounts receivable turnover ratio = Credit sales / Average accounts receivable = $2,017,800/((331,750+377,350)/2) = 5.69 Receivable turnover in days = 365 days / 5.69 = 64 days Answer: Lufkin's receivable turnover in days is 64, this shows that receivables management of the company is poor.