BACHELOR OF BUSINESS ADMINISTRATION

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BUSINESS ADMINISTRATION

FINANCIAL ACCOUNTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
The following data were taken from the records of Z COMPANY for the year ended December 31, Year Accounts receivable determined to be worthless 25, 000Collections received in settlement of notes 180, 000Collections received to settle accounts 2, 450, 000Discounts allowed by creditors 260, 000Discounts taken by customers 40, 000Merchandise returned by customers 15, 000Merchandise returned to suppliers 70, 000Notes given to creditors in settlement of accounts 250, 000Notes received to settle accounts 400, 000Payment to creditors 3, 200, 000Payments on notes payable 100, 000Provision for doubtful accounts 90, 000Purchases on account 3, 900, 000Sales on account 3, 600, 000What is the net realizable value of accounts receivable on December 31, Year 1?
A
605, 000
B
890, 000
C
825, 000
D
670, 000
Explanation: 

Detailed explanation-1: -The allowance for uncollectible accounts is calculated by multiplying the receivable balance in the various aging categories (see table below) by a reserve rate. A higher reserve rate is applied to older receivables because those receivables are less likely to be collected.

Detailed explanation-2: -The days’ sales in accounts receivable can be calculated as follows: the number of days in the year (use 360 or 365) divided by the accounts receivable turnover ratio during a past year.

Detailed explanation-3: -Average accounts receivable is calculated as the sum of starting and ending receivables over a set period of time (generally monthly, quarterly or annually), divided by two.

Detailed explanation-4: -To “write off” an account under this method we use the following journal entry: DR: Bad Debt Expense (for the amount uncollectible). CR: Accounts Receivable (for the amount uncollectible). This journal entry gets rid of the expectation that we will receive these funds and records this amount as an expense.

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