Question

In: Accounting

The following are the selected account balances or total as of January 1, 2020: Accounts receivable

The following are the selected account balances or total as of January 1, 2020:

Accounts receivable $380,000

Merchandise Inventory $260,000

Current Liabilities $280,000

Selected relationship for the year:

Gross profit rate 40%

DSO based on average 40 days

Inventory turnover based on COGS 8X

Current ratio 3:1

Acid Test ratio 2:1

The balance of accounts receivable as of December 31, 2020 is

$380,000
$390,000
$400,000
$420,000

Expert Solution

Answer:

Option D: $420,000

Explanation:

Current Ratio = 3:1

Therefore, Current asset = Current liabilities × 3

= $280,000 × 3 = $840,000

Acid test ratio = 2:1

Therefore, Quick asset = Current liabilities × 2

= $280,000 × 2 = $560,000

Closing inventory = Current assets – Quick assets

Closing inventory = $840,000 -$560,000 = $280,000

Average inventory = (Opening inventory + Closing inventory) / 2

Average inventory = ($260,000 + $280,000) /2 = $270,000

Inventory turnover based on COGS 8X

Therefore, COGS = Average inventory × 8

COGS = $270,000 × 8 = $2,160,000

Gross profit rate = 40%

Therefore, COGS rate = 100%-40% = 60%

Total sales = COGS / COGS rate

Total sales = $2,160,000 / .6

Total sales = 3,600,000

Days sale outstanding (DSO) based on average = 40 days

Receivables turnover = 360 days / 40 days

Receivables turnover = 9

Average Receivables = Total Sales / Receivables turnover

Average Receivables = 3,600,000 / 9

Average Receivables = $400,000

Average Receivables = (opening Receivables + closing Receivables) / 2

$400,000 = ($380,000 + Closing receivables) / 2

Closing receivables / 2 = $400,000- $380,000/2

Closing inventory = $210,000 × 2

Closing inventory = $420,000

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