During the first year of operation, 2018, McGinnis…

Question:

During the first year of operation, 2018, McGinnis Appliance recognized $275,000 of service revenue on the account. At the end of 2018, the accounts receivable balance was $55,300. Even though this is his first year in business, the owner believes he will collect all but about 3 per cent of the ending balance.

Required

  1. What amount of cash was collected by McGinnis during 2018?
  2. Assuming the use of an allowance system to account for uncollectible accounts, what amount should McGinnis record as uncollectible accounts expense in 2018?
  3. What is the net realizable value of receivables at the end of 2018?
  4. Show the effect of these transactions on the financial statements by recording the appropriate amounts in a horizontal statements model like the one shown here. When you record amounts in the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). If element is not affected by the event, leave the cell blank.

Answer:

A. Cash collected = Sales for the year LESS closing balance of accounts receivables = 275000 – 55300 = 219700

B. Uncollectible accounts expense = 3% of ending balance of accounts receivables = 55300 * 3% = 1659

C. Net Realizable value of receivables at end of 2018 = Accounts receivables LESS Uncollectible accounts expense = 55300 – 1659 = 53641

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