Question

Part 2 of 3 During the fiscal year ended December 31, 2020, Lynbrook Inc. had credit sales of $4,780,000. On December 31, 2020, Lynbrook had an unadjusted debit balance in their Allowance for Doubtful Accounts of $15,275. Your accounting department prepared an aging schedule of Lynbrook's December 31, 2020, accounts receivable account. Based on past experience, Lynbrook estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here. December 31, 2020 Age of Accounts Receivable Accounts Receivable $450,000 Not yet due 275,000 1 to 30 days past due 89,000 31 to 60 days past due 42,000 161 to 90 days past due 15,000 Over 90 days past due Expected Percent Uncollectible 1.25% 5.00% 10.00% 35.75% 71.00% Required 1. Estimate the required balance of the Allowance for Doubtful Accounts at December 31, 2020, using the aging of accounts receivable method. 2. Prepare the adjusting entry to record bad debt expense at December 31, 2020. 3. On February 14, 2021, Lynbrook concludes that a customer's $4,000 receivable (created in early 2020) is uncollectible and that the account should be written off. What effect will this action have on Lynbrook's 2021 net income? Explain.

Answer 1

Answer 1. Estimated Uncollectible = ($450,000 * 1.25%) + ($275,000 * 5.00%) + ($89,000 * 10.00%) + ($42,000 * 35.75%) + ($15,000 * 71.00%) Estimated Uncollectible = $53,940 So, the required balance of the Allowance for Doubtful Accounts at December 31, 2020 is $53,940 Answer 2. Credit Date Dec. 31, 2020 General Journal Bad Debt Expense ($53,940 - $15,275) Allowance for Doubtful Accounts Debit 38,665 38,665 Answer 3. Uncollectible receivable of $4,000 will not affect net income as allowance for this uncollectible was already made in 2020. The effect of this transaction will be: decrease in accounts receivable and decrease in allowance for doubtful accounts.