Question

Chamberlain Enterprises Inc. reported the following receivables in its December 31, 2018, year-end balance sheet: Current assets: Accounts receivable, net of $42,000 in allowance for uncollectible accounts $ 308,000 Interest receivable 15,200 Notes receivable 440,000 Additional Information: The notes receivable account consists of two notes, a $90,000 note and a $350,000 note. The $90,000 note is dated October 31, 2018, with principal and interest payable on October 31, 2019. The $350,000 note is dated June 30, 2018, with principal and 8% interest payable on June 30, 2019. During 2019, sales revenue totaled $1,520,000, $1,370,000 cash was collected from customers, and $40,000 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. On March 31, 2019, the $350,000 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. Not including sales revenue, what revenue and expense amounts related to receivables will appear in Chamberlain’s 2019 income statement? 2. & 3. What amounts will appear in the 2019 year-end balance sheet for accounts receivable and Calculate the receivables turnover ratio for 2019.

Answer 1

1. The following revenue and expense amounts related to receivables will appear in Chamberlain's 2017 income statement :

Revenues:

Interest Revenue : $ 16,000

Note # 1 : $ 90,000 x 12 % x 10/12 = $ 9,000

Note # 2 : $ 350,000 x 8% x 3/12 = $ 7,000

Expenses :

Bad Debt Expense : $ 44,000 *

Loss on sale of note receivable : $ 2,450 **

Loss on sale of note receivable :

Carrying value of the discounted note receivable = $ 350,000 + ( $ 350,000 x 8% x 9/12) = $ 3,71,000

Maturity value = $ 350,000 x 108% = $ 378,000

Discount = $ 378,000 x 10% x 3/12 = $ 9,450

Proceeds of sale of note receivable = Maturity value - Discount = $ 378,000 - $ 9,450 = $ 368,550

Loss on sale of note receivable = $ 3,71,000 - $ 368,550 = $ 2,450 **

Accounts Receivable :

	Debit	Credit	Balance
	$	$	$
Beginning ( 308,000 + 42,000)	350,000
Sales Revenue	1,520,000		1,870,000
Cash		1,370,000	500,000
Allowance for Uncollectible Accounts		40,000	460,000
Ending		460,000

Bad debt expense = $ 460,000 x 10% - $ ( 42,000 - 40,000) = $ 44,000*

2. Analysis of accounts receivable
Beginning accounts receivable $350,000*
Add: Credit sales $1,520,000
Less: Write offs(40,000)
Less: Cash collections (1,370,000)
Ending accounts receivable $460,000

*(308,000 + 42,000)

Analysis of allowance for uncollectible accounts
Beginning allowance $42,000
Add: Bad debt expense 44,000**
Less: write offs (40,000)
Ending allowance $ 46,000***

**(42,000 - 40,000 - 46,000 = $44,000)
***($460,000 x 10% =$46,000)

Accounts receivable, net of $46,000 in allowance for uncollectible accounts $414,000

3. Accounts Receivable

Credit Sales / Average Receivable

$1,520,000 / $361,000**** = 4.2

****[($308,000 + 414,000) ÷ 2 = $361,000