Question

Hancock Medical Supply Co., earned $85,000 of revenue on account during Year 1, its first year of operation. During Year 1, Hancock collected $67,600 of cash from its receivables accounts. The company did not write-off any uncollectible accounts. It estimates that it will be unable to collect 1% of revenue on account. What is the net realizable value of receivables that will be reported on the balance sheet at December 31, Year 1

Answer 1

realizable value of the receivable = $16,550

Step-by-step explanation:

First of all let us lay out the important information to be used in calculation clearly:

earnings = $85,000

receivables collected = $67,600

uncollectible amount = 1% of $85,000 = 0.01 × 85,000 = $850

Net realizable value of receivables is the total amount to be received, but that has not yet been received, and is not classified as uncollectible amount. This is calculated thus:

Net value of receivable = earnings - uncollectible amount - receivable collected.

= 85,000 - 850 - 67,600 = $16,550.

Note that the receivable collected is subtracted from the total earnings because it is no longer classified as receivable, once it has been received, hence whatever remains of the total earnings that has not bee received make up receivables.