The Lux Company experiences the following unrelated events and transactions during Year 1. The company’s existing current ratio is 2:1 and its quick ratio is 1.2:1. Lux wrote off $5,000 of accounts receivable as uncollectible. A bank notifies Lux that a customer’s check for $411 is returned marked insufficient funds. The customer is bankrupt. The owners of Lux Company make an additional cash investment of $7,500. Inventory costing $600 is judged obsolete when a physical inventory is taken. Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period. Lux purchases long-term investments for $10,000. Accounts payable of $9,000 are paid. Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange. Lux sells a vacant lot for $20,000 that had been used in its operations. A three-year insurance policy is purchased for $1,500. Separately evaluate the immediate effect of each transaction on the company’s: Quick (acid-test) ratio.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
The Lux Company experiences the following unrelated events and transactions during Year 1. The company’s existing
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Lux wrote off $5,000 of accounts receivable as uncollectible.
-
A bank notifies Lux that a customer’s check for $411 is returned marked insufficient funds. The customer is
bankrupt.
-
The owners of Lux Company make an additional cash investment of $7,500.
-
Inventory costing $600 is judged obsolete when a physical inventory is taken.
-
Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period.
-
Lux purchases long-term investments for $10,000.
-
Accounts payable of $9,000 are paid.
-
Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange.
-
Lux sells a vacant lot for $20,000 that had been used in its operations.
-
A three-year insurance policy is purchased for $1,500.
Separately evaluate the immediate effect of each transaction on the company’s:
Quick (acid-test) ratio.
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