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. The following revenue and expense amount related to receivables will appear in Chamberlain's 2017 Income Statement -

Revenue -

Interest Revenue - $10,000

Note 1 - $60,000 x 12% x 10/12 = $6,000

Note 2 - $200,000 x 6% x 3/12 = $4,000

Expense -

Loss on Sale of Note Receivable : $1,240

Carrying value of discounted note receivable = $200,000 + (200,000 x 6% x 9/12) = $209,000

Maturity Value - $200,000 x 106% = 212,000

Discount - $212,000 x 8% x 3/12 = $4,240

Proceeds of Net Receivable = Maturity Value - Discount = $212,000 - $4,240 = $207,760

Loss on Sale of Net Receivable = $209,000 - $207,760 = $1,240

Analysis of Accounts Receivables :

Beginning Accounts Receivable (218,000+24,000) = $242,000

Add : Credit Sales - $1,340,000

Less: Write Off - $22,000

Less: Cash Collections - $1,280,000

Ending Accounts Receivable = $280,000

Bad Debt Expenses = $280,000 x 10% - (24,000 - 22,000) = $26,000

Allowance for Uncollectible Accounts =$24,000 + $26,000 - $22,000 = $28,000

2. Amounts appearing in 2017 year - end Balance Sheet for Accounts Receivable

Account Receivable ($280,000), net of $28,000 for allowance for uncollectibe accounts - $252,000

3. Receivables Turnover Ratio for 2017

= $1,340,000 / $235,000 = 5.7

Where,

($218,000 + $250,000) / 2 = $235,000