Question

The Miller Company earned $103,000 of revenue on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $72,000 of cash from its receivables accounts. The company estimates that it will be unable to collect 3% of its sales on account. The net realizable value of Miller's receivables at the end of Year 2 was:

Answer 1

Answer:

The net realizable value of Miller's receivables at the end of Year 2 was $27,910

Explanation:

Let's start with the definition of each concept:

Sales on account: These represent sales which are not paid right away.

Account receivable: This is an account which represent the sales on account which currently are still unpaid.

When a sale is payed at the very moment it ocours, it is done using the cash account and the sales accounts.

Allowance for doubful account:  This account is a counter-assets account that decrease the net value of account receivable. It represent the account that will not be collected.

The method to determinate the allowance will be the following:

Sales on account x estimate uncollectiblle = Bad debt expense

$103,000 x 3% of sales =  3090 bad debt expense

The journal entry to record this will be:

bad debt expense debit  3090

allowance for doubful account  credit 3090

The company collected 72,000 of the sales on account during the year so the balance will be:

103,000 - 72,000 = 31,000 account receivable

So resuming the account receivable account have this movements:

account receivable debit for 103,000

sales revenue credit for 103,000

to show the sales on account

and then

cash debit for 72,000

account receivable credit for 72,000

to show the collections of the customer accounts

Now subtracting the espected bad debt we get the Miller's net realizable value at the end of Year 2:

31,000 - 3,090 = 27,910

Account receivable                     31,000

Allowance for doubful accounts (3,090)

net                                                 27,910

Have a nice evening !