A review of the accounts receivable records of Auckland’s Creature Comforts Hotel reveals the following year-end information.

The credit manager believes that the report accurately shows the proportion of the year-end accounts receivable balance that can be traced to months in which credit sales were made. Forty per cent of the hotel’s $6,000,000 annual sales are on credit. e hotel extends 30-day credit terms.

Required:

a) Using the year-end account balance, evaluate the effectiveness of the hotel’s accounts receivable collection system.

b) If the hotel’s peak season runs from November through to January, how does this additional information affect your answer to a).

c) Prepare an aging of accounts receivable sedule in order to obtain additional insight into the status of the hotel’s accounts receivable balance. What further observations can be made from the aging schedule.

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Creature Comforts Hotel - Analysis of age of accounts receivable as at 31/12/X1 Month of sale Accounts receivable % July $ 2,594 1 August 13,448 5 September 2,782 1 October 7,890 3 November 26,300 10 December 210,000 80 Total year-end balance $263,014 100