Concept explainers
(Learning Objectives 1, 4, 5, 6: Apply GAAP for revenue, receivables, collections, and uncollectibles using the percent-of-sales method; account for notes receivable) Lincoln Delivery Corporation is an overnight shipper. Since it sells on credit, the company cannot expect to collect 100% of its accounts receivable. At December 31, 2018, and 2019, respectively, Lincoln reported the following on its balance sheet (in millions of dollars):
December 31, | ||
2019 | 2018 | |
Accounts receivable............................................. | $4,300 | $3,900 |
Less: Allowance for uncollectible accounts.......... | (190) | (210) |
Accounts receivable, net...................................... | $4,110 | $3,690 |
During the year ended December 31, 2019, Lincoln earned service revenue and collected cash from customers. Assume uncollectible-account expense for the year was 3% of service revenue on account and that Lincoln wrote off uncollectible receivables and made other adjustments as necessary (see below). At year-end, Lincoln ended with the foregoing December 31, 2019, balances.
Requirements
- 1. Prepare T-accounts for Accounts Receivable and Allowance for Uncollectible Accounts, and insert the December 31, 2018, balances as given.
- 2. Journalize the following transactions of Lincoln for the year ended December 31, 2019 (explanations are not required):
- a. Service revenue was 532,600 million, of which 15% is cash and the remainder is on account.
- b. Collections from customers on account were $26,364 million.
- c. Uncollectible-account expense was 3% of service revenue on account.
- d. Write-offs of uncollectible accounts receivable were $851 million.
- e. On December 1, Lincoln received a 2-month, 9%, $135 million note receivable from a large corporate customer in exchange for the customer’s past due account; Lincoln made the proper year-end
adjusting entry for the interest on this note. - f. Lincoln’s December 31, 2019, year-end bank statement reported $40 million of non-sufficient funds (NSF) checks from customers.
- 3.
Post your entries to the Accounts Receivable and the Allowance for Uncollectible Accounts T-accounts. - 4. Compute the ending balances for Accounts Receivable and the Allowance for Uncollectible Accounts and compare your balances to the actual
- 5. December 31, 2019, amounts. They should be the same. How much does Lincoln expect to collect from its customers after December 31, 2019?
- 6. Show the net effect of these transactions on Lincoln Delivery’s net income for the year ended December 31, 2019.
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Financial Accounting (12th Edition) (What's New in Accounting)
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