Question

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3, Omega experienced the following events.

(1) Omega earned $220,000 of revenue on account.
(2) Collected $230,000 cash from accounts receivable.
(3) Wrote-off $1,000 of accounts receivable as uncollectible.
Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the amount of net realizable value of receivables shown on the Year 3 balance sheet is?
\$39,360.
$41,000.
$42,640.
$43,000.

Answer 1

To calculate the net realizable value of receivables, the ending balance of accounts receivable is adjusted for write-offs and the allowance for doubtful accounts. After accounting for these, the net realizable value of Omega Company's receivables at the end of Year 3 is $38,360.

Step-by-step explanation:

The student has asked about the calculation of the net realizable value of receivables for Omega Company. To find this value, we first calculate the ending balance of accounts receivable and then adjust it for the estimated uncollectible accounts.

First, we start with the beginning balance of accounts receivable which is $52,000. Then we add the revenue on account which is $220,000 and deduct the cash collected from receivables which is $230,000. This gives us an ending balance before adjustments of $42,000 ($52,000 + $220,000 - $230,000).

Next, we write-off the uncollectible amount of $1,000, resulting in an adjusted receivable balance of $41,000. Since the company estimates that 4% of receivables are uncollectible, we calculate this as $41,000 x 4% = $1,640.

The allowance for doubtful accounts has a beginning balance of $1,400. With the write-off of $1,000, this account will be reduced, leaving a new balance of $400 ($1,400 - $1,000). We now need to adjust the allowance for the new estimation of uncollectibles, which is $1,640. The adjustment needed is $1,640 - $400 = $1,240. Adding this adjustment to the starting balance, our adjusted allowance for doubtful accounts at year-end is $2,640 ($1,400 + $1,240).

Therefore, the net realizable value of receivables is the adjusted receivables balance of $41,000 minus the adjusted allowance for doubtful accounts of $2,640, resulting in $38,360.