Question

Lindy Company uses an allowance method to account for bad debts. Lindy estimates that 5% of the outstanding accounts receivable will be uncollectible. At the end of the year, Lindy has outstanding accounts receivable of $750,000, and a debit balance in the Allowance for Uncollectible Accounts of $9,000. Lindy should record uncollectible accounts expense of:

a.$28,500
b.$37,500
c.$46,500
d.$55,500

Answer 1

Lindy Company calculates its uncollectible accounts expense by estimating that 5% of accounts receivable will be uncollectible, which amounts to $37,500, and adjusting for an existing debit balance in the Allowance for Uncollectible Accounts of $9,000. The total uncollectible accounts expense recorded should be $46,500.

Step-by-step explanation:

Lindy Company needs to calculate the required balance for its Allowance for Uncollectible Accounts using the allowance method. With an existing debit balance of $9,000 and an estimate that 5% of the outstanding accounts receivable will be uncollectible, we will perform the following calculation: Estimated uncollectible accounts = 5% of $750,000 = $37,500

Since the Allowance for Uncollectible Accounts has a debit balance of $9,000, it needs to be brought to the correct credit balance. This means the adjustment will need to cover both the existing debit balance and the newly calculated estimate: Uncollectible accounts expense = Existing debit balance + Estimated uncollectible accounts. Uncollectible accounts expense = $9,000 + $37,500 = $46,500. Therefore, Lindy should record $46,500 as uncollectible accounts expense.