Question

Chamberlain Enterprises Inc. reported the following receivables in its December 31, 2016, year-end balance sheet:

Current assets:
Accounts receivable, net of $24,000 in allowance for
uncollectible accounts	$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, 2016, with principal and interest payable on October 31, 2017. The $200,000 note is dated June 30, 2016, with principal and 6% interest payable on June 30, 2017.

2.  During 2017, 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, 2017, 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 2017 income statement?

2.  What amounts will appear in the 2017 year-end balance sheet for accounts receivable?

3.  Calculate the receivables turnover ratio for 2017.

Answer 1

1.

Bad debt expense:

	Accounts receivable
	Opening	242000
	Add sales	1340000
	Less collection	-1280000
	Less written off	-22000
	Closing	280000
	Rate of allowance	10%
	Allowance balance required	28000
	Unadjusted balance in books
	Opening balance	24000
	Less written off	-22000
a	Unadjusted balance in books	2000
b	Balance required	28000
c=b-a	Bad debt expense	26000

Interest revenue of 5760 on two note receivables.

Note amount	Interest rate	Interest receivable	Interest revenue for months	Interest revenue
60,000	8%	800	10	4,000
2,00,000	6%	6,000		1760
		6,800		5,760

workings:

	Note amount	2,00,000
	Interest portion	12,000
	Total note amount receivable	2,12,000
	Discount rate	8%
	Number of months to maturity	3
	Discount amount	4,240
		212000*8%*3/12
	Cash received	2,07,760
	Carrying value in books
	Note amount	200000
	Interest receivable	6000
a	Total	206000
b	Cash received	2,07,760
c=b-a	Interest revenue	1,760

2. AR balance:

Accounts receivable
Gross balance	280000
Less allowacne	28000
Net balance	252000

3.

accounts receivables turn over= sales/ average accounts receivable =1340000/ (242000+280000)/2 = 5.13