Concept explainers
Accounts and notes receivable; discounting a note receivable; receivables turnover ratio
• LO7–5, LO7–6, LO7–7, LO7–8, LO7–9
Chamberlain Enterprises Inc. reported the following receivables in its December 31, 2018, year-end
Current assets: | |
$ 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, 2018, with principal and interest payable on October 31, 2019. The $200,000 note is dated June 30, 2018, with principal and 6% interest payable on June 30, 2019.
- 2. During 2019, 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, 2019, 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 2019 income statement?
- 2. What amounts will appear in the 2019 year-end balance sheet for accounts receivable?
- 3. Calculate the receivables turnover ratio for 2019.
(1)
Accounts receivable:
Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.
Note receivable:
Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.
To compute: The amount of revenues and expenses related to receivables to be reported in the income statement apart from sales revenue:
Explanation of Solution
Interest Revenue:
- Compute the amount of interest on $200,000 note:
Principal = $200,000
Rate of interest = 6%
Period = 6 Months (June 30 to December 31)
- Compute the amount of interest on $60,000 note:
Total Amount of Interest Reported in balance Sheet as on December 31, 2018 | $6,800 |
Less: Interest on $200,000 Note | ($6,000) |
Interest on $60,000 Note | $800 |
Table (1)
- Compute the interest rate of $60,000 Note:
The interest on $60,000 note amounted to $800 represents the interest for two months (November and December). Hence, the annual interest on the $60,000 note is
Therefore, the rate of interest on $60,000 note is
- Compute the amount of interest on $60,000 note to be reported on the income statement of 2019:
Principal = $60,000
Rate of interest = 8%
Period = 10 Months (January 1 to October 31, 2019)
- Compute the amount of interest on $200,000 note to be reported on the income statement of 2019:
Principal = $200,000
Rate of interest = 6%
Period = 6 Months (January 1 to June 30, 2019)
- Compute the total interest revenue:
Interest on $60,000 Note | $4,000 |
Interest on $200,000 Note | 6,000 |
Total Interest Revenue to be Reported in 2019 Income Statement | $10,000 |
Table (2)
Bad Debts Expense:
- Compute the Ending Accounts Receivables:
Accounts Receivable Accounts Analysis | |
Beginning Balance, Net | $218,000 |
Add: Allowance | 24,000 |
Beginning Balance, Gross | 242,000 |
Add: Credit Sales | 1,340,000 |
Less: Write-offs | (22,000) |
Less: Cash Collections | (1,280,000) |
Ending Balance | $280,000 |
Table (3)
- Compute the amount of Bad debts expense during this year:
Allowance for Uncollectible Accounts Analysis | |
Details | Amount ($) |
Ending Balance of Allowance for Uncollectible Accounts (1) | $28,000 |
Add: Write offs | 22,000 |
Less: Beginning Balance of Allowance for Uncollectible Accounts | (24,000) |
Bad Debts Expense During the Year | 26,000 |
Table (4)
Loss on Sale of Note Receivables:
- Compute the amount of interest accrued:
Principal = $200,000
Rate of interest = 6%
Period = 9 Months (June 30, 2018 to March 31, 2019)
- Compute the amount of interest on maturity:
Principal = $200,000
Rate of interest = 6%
Period = 1Year
- Compute the maturity value:
- Compute the amount discount on discounting the note:
- Compute the amount of cash proceeds:
- Compute the loss on sale of notes receivable:
Face value of Notes Receivable | $200,000 |
Add: Interest Receivable | 9,000 |
Less: Cash Proceeds | (207,760) |
Loss on Sale of Investments | $1,240 |
Table (5)
Revenues and expenses related to receivables to be reported in the income statement apart from sales revenue:
Revenues: | |
Interest Revenue: | |
Interest on $60,000 Note | $4,000 |
Interest on $200,000 Note | 6,000 |
Total Revenue | $10,000 |
Expenses: | |
Bad Debts Expense | $26,000 |
Losses: | |
Loss on Sale of Inventories | $1,240 |
Table (6)
(2)
Explanation of Solution
Accounts Receivable:
C Company | ||
Balance Sheet | ||
As on December 31, 2019 | ||
Details | Amount ($) | Amount ($) |
Assets: | ||
Current assets: | ||
Accounts Receivable | 280,000 | |
Less: Allowance for bad debts | (28,000) | 252,000 |
Table (7)
The amount that will appear in the 2019 year-end balance sheet for accounts receivable is $252,000.
(3)
To calculate: The receivable turnover ratio for 2019.
Explanation of Solution
Accounts receivable turnover ratio
Receivable turn over indicates that how many times on average, a company is able to turn its receivable in to cash during an accounting period. It is calculated dividing the net sales by the average inventory.
Working notes:
Compute the amount of average accounts receivable:
The receivable turnover ratio for 2019 is 5.7 times.
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Intermediate Accounting
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