Question

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

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.

Short answer

The average collection period will be 30 days.

Step-by-step solution

Information provided in the question

Credit sales = $1,500,000

Accounts receivables = $375,000

Calculation of average collection period

The average collection period will be 30 days.

$\begin{array}{rcl}\mathrm{Average}\mathrm{collection}\mathrm{period}& =& \frac{\mathrm{Accounts}\mathrm{receivables}}{\left({\displaystyle \frac{\mathrm{Credit}\mathrm{sales}}{120}}\right)}\\ & =& \frac{\$375,000}{\left({\displaystyle \frac{\$1,500,000}{120}}\right)}\\ & =& 30\mathrm{days}\end{array}$