Canaday Ltd. has the following receivables balances ($M):Gross Accounts receivable           $175Bad-debt reserve                             (3)Net accounts receivable               $172Two years ago a customer was approved for an unusually large credit sale of $7M over the objections of the credit and collections department. Shortly after the sale the customer’s business began to deteriorate due to an unexpected recession. To date it has paid only $2M against the order despite the fact that it has consumed all of the material purchased. The collections department has worked diligently to collect the remaining $5M without success. The customer filed for bankruptcy this morning with essentially no assets to pay a large number of creditors. Evaluate the financial statement impact of the bankruptcy on Canaday. Assume Canaday’s product cost is 40% of revenue and the bad debt reserve of $3M will be fully reestablished.

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Asked Mar 16, 2019
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Canaday Ltd. has the following receivables balances ($M):

Gross Accounts receivable           $175

Bad-debt reserve                             (3)

Net accounts receivable               $172

Two years ago a customer was approved for an unusually large credit sale of $7M over the objections of the credit and collections department. Shortly after the sale the customer’s business began to deteriorate due to an unexpected recession. To date it has paid only $2M against the order despite the fact that it has consumed all of the material purchased. The collections department has worked diligently to collect the remaining $5M without success. The customer filed for bankruptcy this morning with essentially no assets to pay a large number of creditors. Evaluate the financial statement impact of the bankruptcy on Canaday. Assume Canaday’s product cost is 40% of revenue and the bad debt reserve of $3M will be fully reestablished.

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Expert Answer

Step 1

Balance receivable from the customer = $ 7 mn - amount collected = $ 7 mn - $ 2 mn = $ 5 mn.

This must be part of the $ 175 mn gross receivables on the book of the company.

Step 2

Since,

  • The collections department has worked diligently to collect the remaining $5M without success.
  • The customer filed for bankruptcy this morning with essential...

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