The Patchwork Corporation manufactures sweaters for sale to athletic-wear retailers. The following information was available on Patchwork for the years ended December 31, 2013, and 2014:
12/31/13 12/31/14
Cash $ 20,000 $ 15,000
Accounts receivable 90,000 ?
Allowance for doubtful account 8,500 ?
Inventory 85,000 80,000
Current liabilities 80,000 86,000
Total credit sales 600,000 550,000
Collections on accounts receivable 440,000 500,000
During 2014, Patchwork had the following transactions:
1. On June 1, 2014, sales of $80,000 to a major customer were settled, with Patchwork accepting an $80,000, oneyear note bearing 7% interest that is payable at maturity. The $80,000 is not included in the total credit salesamount above.
2. Patchwork factors some accounts receivable at the end of the year. Accounts totalling $60,000 are transferred toPrimary Factors Inc., with recourse. Primary Factors retains 5% of the balances, and will receive the collectionsdirectly from Patchwork's customers. Patchwork is assessed a finance charge of 6% on this transfer. The fair valueof the recourse obligation is $7,000.
3. Patchwork wrote off $3,200 of accounts receivable during 2014.
4. Based on the latest available information, the 2014 allowance for doubtful accounts should have a balance of$12,000 at December 31, 2014.
Additional information:
Included in the cash balance at December 31, 2014, are the following: a chequing account with a balance of $9,600,postage stamps of $100, petty cash of $300, coins and currency on hand of $3,000, and postdated cheques from customers of $2,000. Patchwork is a private company that follows ASPE.
Instructions
(a) Prepare the journal entry for the factoring of the accounts receivable to Primary Factors Inc.
(b) Based on the above transactions and additional information, determine the balances of Accounts Receivable andBad Debt Expense at December 31, 2014.
(c) Prepare the current assets section of Patchwork's statement of financial position at December 31, 2014.
(d) Calculate the current ratios for Patchwork for 2013 and 2014.
(e) Calculate the receivables turnover ratio for Patchwork for 2014. Patchwork's receivables turnover ratio for 2013was 3.8 times.
(f) Comment on Patchwork's liquidity and ability to collect accounts receivable. Comment also on the improvementor deterioration of the current and accounts receivable turnover ratios.
(g) Discuss the effect on the current and accounts receivable turnover ratios if Patchwork had decided to assign$40,000 of accounts receivable instead of factoring them to Primary Factors Inc. Recalculate the ratios to supportyour conclusions.