[jennijill]

NINJA Question –

I am confused on NINJA SIM #50.
I understand how to get the desired $107060 in allowance for doubtful accounts. But why does the $5000 affect the aging analysis but not the allowance for doubtful account?

Lambert, Inc., uses the allowance method to record doubtful accounts for financial statement reporting. In prior years, Lambert estimated its uncollectible accounts receivable by applying an estimated percentage to each category reported on the accounts receivable aging analysis. This percentage is based on historical data. The following table summarizes the accounts receivable aging analysis at December 31, Year 1, and the related estimated percentage uncollectible for each category.

Accounts Receivable Aging Analysis at December 31, Year 1:

Aging Category Balance at December 31, Year 1 Estimated Percentage Uncollectible
0–30 days $225,000 1%
31–60 days $240,000 9%
61–90 days $127,000 23%
Over 90 days $85,000 60%
The balance in the allowance for doubtful accounts at January 1, Year 1, was $62,000. The activity in this account during Year 1 consisted of the write-off of accounts valued at $19,000 and a recovery of $4,000 in accounts that were written off in previous years.

The Lambert accounting staff identified the following unrecorded adjustments while performing the year-end review of accounts receivable balances:

• An account receivable for $12,000 that was invoiced in February, Year 1, was deemed uncollectible because the customer was declared bankrupt on November 30, Year 1. The balance has not yet been written off.
• An account receivable for $5,000 that was invoiced in August of Year 1 was collected. However, it was not properly removed from the accounts receivable subsidiary ledger and the aging analysis.

As a result of the change in the Lambert credit policy during Year 1, the CFO believes that the estimated percentage uncollectible for each aging category should be increased by two percentage points.

The following table shows the allowance for doubtful accounts at December 31, Year 1:

Total 0–30 Days 31–60 Days 61–90 Days Over 90 Days
Accounts receivable $677,000 $225,000 $240,000 $127,000 $85,000
Adjustments $(17,000) 0 0 0 $(17,000)
Adjusted accounts receivable $660,000 $225,000 $240,000 $127,000 $68,000
Estimated percentage uncollectible 3% 11% 25% 62%
Allowance for doubtful accounts $107,060 $6,750 $26,400 $31,750 $42,160

Assume that the Lambert accounting staff has already made all necessary adjusting entries at December 31, Year 1, with the exception of the adjustment to record the current year’s bad debt expense. Use the information above to prepare the journal entry that records the bad debt expense for Year 1, if any.

ANSWER:
Bad debt expense 72,060 –
Allowance for doubtful accounts – 72,060

The balance in allowance for doubtful accounts prior to the year-end adjustment is $35,000:

Beginning balance $62,000
Write-off (19,000)
Recovery 4,000
Write-off (12,000)
Ending balance $35,000

[Globetrotter]

Jennijill,
I think $5,000 does not affect allowance account because it was never a part of A/R write off through Allowance.
Perhaps when the customer check was received, Lambert debited cash and credited revenues instead of A/R subledger. When mistake was fixed, revenue was debited and A/R was (correctly) credited. This, A/R aging I affected but Allowance is not.

[Author]

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