Question

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

Age of Receivables April 30, 2013
(1)	(2)	(3)	(4)
Month of Sales	Age of Account	Amounts	Percent of Amount Due
April.................................	0–30	$ 131,250	____
March...............................	31–60	93,750	____
February...........................	61–90	112,500	____
January.............................	91–120	37,500	____
Total receivables............		$ 375,000	100%

           

a. Fill in column (4) for each month.

            b. If the firm had $1,500,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.

            c. If the firm likes to see its bills collected in 35 days, should it be satisfied with the average collection period?

            d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

            e. What additional information does the aging schedule bring to the company that the average collection period may not show?

Answer 1

a.

Month of Sale	Age of Account	Amount	Percent of amounts due
	Days	$	%
April	0-30	131,250	35
March	31-60	93,750	25
February	61 - 90	112,500	30
January	91-120	37,500	10
Total Receivables		375,000

b. Average collection period = 120 / Accounts Receivables Turnover = 120 / 1,500,000 x 375,000 = 30 days

c. Yes, it should be satisfied, as the actual collection period is shorter than 35 days.

d. No, having regard to the ageing schedule, it should not be satisfied as only 35% of total receivables are collected within 30 days. The remaining 65% are collected in more than 30 days.

e. What percentage of receivables are in which age category.