Question

At the beginning of the year, a company had accounts receivable of $700,000 and an allowance for doubtful accounts with a credit balance of $60,000. During the current year, sales on account were $195,000 and collections on account were $115,000. Also during the current year, the company wrote off $11,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $72,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year

Answer 1

The cash realizable value (CRV) increased by $46,000 during the current year, calculated by accounting for sales on account, collections, write-offs, and year-end adjustments to the Allowance for Doubtful Accounts.

Step-by-step explanation:

Let's take a step-by-step approach to calculate how the cash realizable value (CRV) changed during the current year:

• Start with the initial Accounts Receivable (AR): $700,000
• Subtract the initial Allowance for Doubtful Accounts (ADA): (-$60,000)
• Calculate the initial CRV: $700,000 - $60,000 = $640,000
• Add Sales on Account: +$195,000
• Subtract Collections on Account: (-$115,000)
• Subtract write-offs: (-$11,000)

Before the year-end adjustment, the adjusted CRV would be:

$640,000 (initial CRV) + $195,000 - $115,000 - $11,000 = $709,000

With a year-end ADA balance adjustment, the company wants a $72,000 credit balance. The required year-end adjusting entry would be the difference between the desired year-end ADA balance and the current ADA balance after write-offs:

$72,000 (desired ADA balance) - ($60,000 original ADA balance - $11,000 write-offs) = $23,000

This $23,000 is an additional credit to ADA, so we need to reduce the CRV by this amount:

$709,000 (adjusted CRV) - $23,000 (additional ADA) = $686,000 CRV at year-end.

The change in cash realizable value during the year is the difference between the initial and ending CRV:

$686,000 (ending CRV) - $640,000 (initial CRV) = $46,000 increase.