Concept explainers
Accounts and notes receivable; discounting a note receivable; receivables turnover ratio
• LO7–5, LO7–6, LO7–7, LO7–8, LO7–9
Chamberlain Enterprises Inc. reported the following receivables in its December 31, 2018, year-end balance sheet:
Current assets: | |
$ 218,000 | |
Interest receivable | 6,800 |
Notes receivable | 260,000 |
Additional Information:
- 1. The notes receivable account consists of two notes, a $60,000 note and a $200,000 note. The $60,000 note is dated October 31, 2018, with principal and interest payable on October 31, 2019. The $200,000 note is dated June 30, 2018, with principal and 6% interest payable on June 30, 2019.
- 2. During 2019, sales revenue totaled $1,340,000, $1,280,000 cash was collected from customers, and $22,000 in accounts receivable were written off. All sales are made on a credit basis.
Bad debt expense is recorded at year-end by adjusting the allowance account to an amount equal to 10% of year-end accounts receivable. - 3. On March 31, 2019, the $200,000 note receivable was discounted at the Bank of Commerce. The bank’s discount rate is 8%. Chamberlain accounts for the discounting as a sale.
Required:
- 1. In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Chamberlain’s 2019 income statement?
- 2. What amounts will appear in the 2019 year-end balance sheet for accounts receivable?
- 3. Calculate the receivables turnover ratio for 2019.
(1)
Accounts receivable:
Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.
Note receivable:
Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.
To compute: The amount of revenues and expenses related to receivables to be reported in the income statement apart from sales revenue:
Explanation of Solution
Interest Revenue:
- Compute the amount of interest on $200,000 note:
Principal = $200,000
Rate of interest = 6%
Period = 6 Months (June 30 to December 31)
- Compute the amount of interest on $60,000 note:
Total Amount of Interest Reported in balance Sheet as on December 31, 2018 | $6,800 |
Less: Interest on $200,000 Note | ($6,000) |
Interest on $60,000 Note | $800 |
Table (1)
- Compute the interest rate of $60,000 Note:
The interest on $60,000 note amounted to $800 represents the interest for two months (November and December). Hence, the annual interest on the $60,000 note is
Therefore, the rate of interest on $60,000 note is
- Compute the amount of interest on $60,000 note to be reported on the income statement of 2019:
Principal = $60,000
Rate of interest = 8%
Period = 10 Months (January 1 to October 31, 2019)
- Compute the amount of interest on $200,000 note to be reported on the income statement of 2019:
Principal = $200,000
Rate of interest = 6%
Period = 6 Months (January 1 to June 30, 2019)
- Compute the total interest revenue:
Interest on $60,000 Note | $4,000 |
Interest on $200,000 Note | 6,000 |
Total Interest Revenue to be Reported in 2019 Income Statement | $10,000 |
Table (2)
Bad Debts Expense:
- Compute the Ending Accounts Receivables:
Accounts Receivable Accounts Analysis | |
Beginning Balance, Net | $218,000 |
Add: Allowance | 24,000 |
Beginning Balance, Gross | 242,000 |
Add: Credit Sales | 1,340,000 |
Less: Write-offs | (22,000) |
Less: Cash Collections | (1,280,000) |
Ending Balance | $280,000 |
Table (3)
- Compute the amount of Bad debts expense during this year:
Allowance for Uncollectible Accounts Analysis | |
Details | Amount ($) |
Ending Balance of Allowance for Uncollectible Accounts (1) | $28,000 |
Add: Write offs | 22,000 |
Less: Beginning Balance of Allowance for Uncollectible Accounts | (24,000) |
Bad Debts Expense During the Year | 26,000 |
Table (4)
Loss on Sale of Note Receivables:
- Compute the amount of interest accrued:
Principal = $200,000
Rate of interest = 6%
Period = 9 Months (June 30, 2018 to March 31, 2019)
- Compute the amount of interest on maturity:
Principal = $200,000
Rate of interest = 6%
Period = 1Year
- Compute the maturity value:
- Compute the amount discount on discounting the note:
- Compute the amount of cash proceeds:
- Compute the loss on sale of notes receivable:
Face value of Notes Receivable | $200,000 |
Add: Interest Receivable | 9,000 |
Less: Cash Proceeds | (207,760) |
Loss on Sale of Investments | $1,240 |
Table (5)
Revenues and expenses related to receivables to be reported in the income statement apart from sales revenue:
Revenues: | |
Interest Revenue: | |
Interest on $60,000 Note | $4,000 |
Interest on $200,000 Note | 6,000 |
Total Revenue | $10,000 |
Expenses: | |
Bad Debts Expense | $26,000 |
Losses: | |
Loss on Sale of Inventories | $1,240 |
Table (6)
(2)
Explanation of Solution
Accounts Receivable:
C Company | ||
Balance Sheet | ||
As on December 31, 2019 | ||
Details | Amount ($) | Amount ($) |
Assets: | ||
Current assets: | ||
Accounts Receivable | 280,000 | |
Less: Allowance for bad debts | (28,000) | 252,000 |
Table (7)
The amount that will appear in the 2019 year-end balance sheet for accounts receivable is $252,000.
(3)
To calculate: The receivable turnover ratio for 2019.
Explanation of Solution
Accounts receivable turnover ratio
Receivable turn over indicates that how many times on average, a company is able to turn its receivable in to cash during an accounting period. It is calculated dividing the net sales by the average inventory.
Working notes:
Compute the amount of average accounts receivable:
The receivable turnover ratio for 2019 is 5.7 times.
Want to see more full solutions like this?
Chapter 7 Solutions
INTERMEDIATE ACCOUNTING LL+CONNECT >BI<
- ts The Tz Corp. estimates bad debt expense at 0.30 % of credit sales . The company reported accounts receivable and allowance for uncollectible accounts of 490,000 and 1,610 respectively December 31 2023. During 2024 , Tzs credit sales and cash collections were $327,000 and respectively , and $1,890 in accounts receivable were written off 2024 bad debt expense is $ 981 . $ 1,660 $ 1,056 . None of the options listed . $987arrow_forwardE7.16 (LO 2, 3, 5) (Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances. Dr. Cr. Accounts Receivable $82,000 Allowance for Doubtful Accounts 2,120 Sales Revenue $430,000 Instructions Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.) 1. To obtain additional cash, Collins factors without recourse $25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored. 2. To obtain a 1-year loan of $55,000, Collins pledges $65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial. 3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable. 4. Based on an aging analysis, an allowance of $5,800 should be…arrow_forwardABC discounted with recourse its P500,000 notes receivable, 10%, one-year note dated January 1, 2005. The note was discounted July 1, 2005 at discount rate of 12%. At maturity date, P50,000 of the discounted note was dishonored, and additional charge of P3,000 was collected by the bank. How much should be debited to Accounts Receivable for the dishonored note?P50,000 P53,000 P55,000 P58,000arrow_forward
- 2. On Oct 1, 20X1 ABC Co. discounted a one year 12% P600,000 note received from a customer on January 1, 20X1 with a bank at 14% on a without recourse basis. How much is the proceeds from note discounting? 576,480 648,480 654,000 672,000arrow_forwardProblem 3 On February 1, 2020 Kaw Tan Company casually factored receivables with a carrying value of P500,000 to Kring Krong. Kring Krong assessed 3% of the total receivables as finance charge and retains 5% of the uncollected factored accounts for any adjustment and returns in any excess. Kaw Tan has always maintained a 10% allowance for doubtful accounts. Cash proceeds of Kaw Tan from factoring was P400,000. By the end of February 2020, half of the factored accounts were collected. In March 2020, customers returned goods costing P50,000 and it is the policy of Kaw Tan to maintain 20% gross profit on cost. Customers owing P60,000 paid within the discount period and relevant term was 2/30, n/45. By the end of March 2020, all factored receivables were collected. Prepare the journal entries in the books of Kaw Tanarrow_forwardProblem 4. Receivables The balance of PT Renjana's Receivables as of 31 December 2018 was IDR 1,389,000,000, allowance for doubtful accounts was IDR 27,780,000. The transactions for 2019 are as follows: Lending money on March 1, 2019, and receiving notes payable from PT Mirana IDR 120,000,000, 13%, 3 years. Similar money orders carry a 12% risk. (PVF3.12% = 0.71178; PVFOA3.12% = 2.40183). On September 1, 2019, as collateral for PT Nina's receivables Rp. 700,000,000 to Bank Mandiri as collateral for notes payable of 10%, Rp. 400,000,000, finance charge of 1% on notes payable. Lending money to PT Melati on October 1, 2019 IDR 50,000,000, 12%, 6 months. Write off PT Sarita's Rp 80,000,000 receivables due to bankruptcy. Factoring receivables of Rp. 700,000,000 to PT Kirana Finance, finance expense of 1.5% of the factored receivables and retained 1%. Credit sales of IDR 1,345,000,000. At the end of November 31, 2019, PT Nina's receivables were collateralized for IDR 280 million, 1%…arrow_forward
- 11.2 Amount due at maturity: 2,900 Discount rate: 6 ¼ Time: 180 days Maturity Value (MV) = 2900 Discount Rate (r)=6 1/4 Time (n) = 180 days What is the Bank Discount and Proceedsarrow_forwardPA4. 9.2 Jars Plus recorded $861,430 in credit sales for the year and $488,000 in accounts receivable. The uncollectible percentage is 2.3% for the income statement method, and 3.6% for the balance sheet method. Record the year-end adjusting entry for 2018 bad debt using the income statement method. Record the year-end adjusting entry for 2018 bad debt using the balance sheet method. Assume there was a previous debit balance in Allowance for Doubtful Accounts of $10,220, record the year-end entry for bad debt using the income statement method, and then the entry using the balance sheet method. Assume there was a previous credit balance in Allowance for Doubtful Accounts of $5,470, record the year-end entry for bad debt using the income statement method, and then the entry using the balance sheet method.arrow_forwardThis is a variation of E 7–20 modified to focus on factoring with recourse under IFRS.]Mountain High Ice Cream Company reports under IFRS. Mountain High transferred $60,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amountto Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables,it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,000). Mountain High anticipates a $3,000 recourse obligation. The bank charges a 2% fee (2% of $60,000), and requires thatamount to be paid at the start of the factoring arrangement. Mountain High has transferred control over the receivables, but determines that it still retains substantially all risks and rewards associated with them.Required:Prepare the journal entry to record the transfer on the books of Mountain High, considering whether the sale criteria under IFRS have been…arrow_forward
- Company X has trade credit policy 1/10 N45. If you can borrow from a bank at 9,5% annual rate, would it be beneficial to borrow money and pay off invoices earlier?arrow_forwardE9.8 (LO 2), AP On December 31, 2021, when its Allowance for Doubtful Accounts had a zero balance, Ling Co. estimated that 2% of its net accounts receivable of $450,000 will become uncollectible and records the necessary adjustment to Allowance for Doubtful Accounts. On May 11, 2022, Ling Co. determined that the Jeff Shoemaker account was uncollectible and wrote off $1,100. On June 12, 2022, Shoemaker paid the amount previously written off. Instructions A. Prepare the journal entries on December 31, 2021, May 11, 2022, and June 12, 2022. Journalize entries for the sale of accounts receivable.arrow_forwardSpot (28 October 2018) 1.1017/18 4.2200/699 1.3917/87 1 Month 473/492 74/119 106/138 2 Month 103/106 152/202 225/285 3 Month -187/+187 278/228 36/42 The following rates are quoted by banks as at 28 October 2018.Based on the above rates, calculate the following (assume no margins or charges areimposed and all exchange controls/regulations are complied with): a. Quoting bank sells USD/MYR at value spotarrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education