Accounts Receivable Accounting – Calculating Net Value

Exercise Condition:

Wessley Medical Supply Co., which had no beginning balance in its Accounts Receivable and Allowance for Doubtful Accounts, earned $80,000 of revenue on account during 2006.

During 2006 Wessley collected $64,000 of cash from its receivables accounts. The company estimates that it will be unable to collect 1% of revenue on account.

Question: the amount of net realizable value of receivables on the December 31, 2006 balance sheet would be:

  • A) $16,640
  • B) $15,200
  • C) $16,000
  • D) $15,000

Answer & Explanation:

First: calculate accounts receivable at the end of 2006, i.e. $80000 (sales) – $64000 (collections)=$16000

Second: calculate amount of allowance to account for, i.e. $80000*1%=$800, since 1% is calculated on the annual sales on account, which were $80000.

Third: calculate net realizable value of receivables as of year end, i.e.:
$16 000-$ 800=$15200

So the answer is B