CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingHard
A publicly traded company, Zenith Corp., recorded sales of $1,000,000 on credit during the year. The terms of these sales were 2/10, net 30. Zenith Corp. uses the gross method to account for sales discounts. Historically, 70% of customers take advantage of the discount. What is the net realizable value of Zenith Corp.'s accounts receivable at year-end, assuming all sales occurred at year-end and no collections have been made?
- A$1,000,000
- B$980,000
- C$986,000
- D$972,000
Show answer & explanationAnswer & explanation
Correct answer: C. $986,000
Under the gross method, sales are initially recorded at their full amount. However, to present accounts receivable at net realizable value, an allowance for sales discounts must be estimated and recorded. This allowance reflects the expected discounts that will be taken by customers.
Why the other options are wrong
- A. This is the gross amount of receivables, not the net realizable value after considering discounts.
- B. This assumes all customers take the discount, which is incorrect.
- D. This implies a higher discount taken or a different percentage.
Net Realizable Value of Receivables
The estimated amount of cash a company expects to collect from its accounts receivable, after factoring in uncollectible accounts and sales discounts.
- Accounts Receivable is presented at NRV on the balance sheet.
- Requires estimating uncollectible accounts (bad debt) and sales discounts.
- Allowance for Doubtful Accounts and Allowance for Sales Discounts reduce gross receivables to NRV.
Memory trick: NRV: Gross Minus Bad Debt Minus Discounts.