Chapter 9 Solutions

March 21, 2018 | Author: Valeed Ch | Category: Bad Debt, Debits And Credits, Revenue, Corporate Jargon, Income Statement
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CHAPTER 9RECEIVABLES QUESTION INFORMATION Number EO9-1 EO9-2 EO9-3 EO9-4 EO9-5 EO9-6 EO9-7 EO9-8 EO9-9 EO9-10 EO9-11 EO9-12 EO9-13 EO9-14 EO9-15 EO9-16 PE9-1A Objective 9-1 9-1 9-1 9-1 9-2 9-2 9-4 9-7 9-4 9-5 9-6 9-6 9-6 9-6 9-6 9-7 9-3 PE9-1B 9-3 PE9-2A 9-3 PE9-2B 9-3 PE9-3A 9-4 PE9-3B 9-4 PE9-4A 9-4 PE9-4B 9-4 PE9-5A 9-6 PE9-5B 9-6 Ex9-1 9-1 Description Entries for uncollectible accounts using the direct writeoff method Entries for uncollectible accounts using the direct writeoff method Entries for uncollectible accounts using the allowance method Entries for uncollectible accounts using the allowance method Percent of sales method of estimating uncollectible accounts Percent of sales method of estimating uncollectible accounts Aging method of estimating uncollectible accounts Aging method of estimating uncollectible accounts Notes receivable due date, maturity value, and entry Notes receivable due date, maturity value, and entry Classification of Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Time 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min AACSB Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic AICPA FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement 33 SS GL Number Objective Ex9-2 9-2 Ex9-3 9-3 Ex9-4 9-3 Ex9-5 9-3, 9-4 Ex9-6 9-4 Ex9-7 9-4 Ex9-8 9-4 Ex9-9 9-4 Ex9-10 9-4 Ex9-11 9-4 Ex9-12 9-4 Ex9-13 9-5 Ex9-14 9-5 Ex9-15 9-5 Ex9-16 9-5 Ex9-17 9-5 Ex9-18 9-5 Ex9-19 9-6 Ex9-20 9-6 Ex9-21 9-6 Ex9-22 9-6 Ex9-23 9-6 Description receivables Difficulty Time AACSB AICPA Nature of uncollectible accounts Entries for uncollectible accounts, using direct write-off method Entries for uncollectible accounts, using allowance method Entries to write off accounts receivable Providing for doubtful accounts Number of days past due Aging-of-receivable schedule Estimating allowance for doubtful accounts Adjustment for uncollectible accounts Estimating doubtful accounts Entry for uncollectible accounts Entries for bad debt expense under the direct write-off and allowance methods Entries for bad debt expense under the direct write-off and allowance methods Effect of doubtful accounts on net income Effect of doubtful accounts on net income Entries for bad debt expense under direct write-off and allowance methods Entries for bad debt expense under direct write-off and allowance methods Determine due date and interest on notes Entries for notes receivable Entries for notes receivable Entries for notes receivable, including year-end entries Entries for receipt and Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 15 min Analytic FN-Measurement Moderate 20 min Analytic FN-Measurement Exl Moderate 20 min Analytic FN-Measurement Exl Easy 5 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Easy 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement 34 SS Exl GL Number Objective Ex9-24 9-4, 9-6 Ex9-25 9-7 Ex9-26 FAI Ex9-27 FAI Ex9-28 FAI Ex9-29 FAI Ex9-30 Appendix Ex9-31 Appendix Pr9-1A 9-4 Pr9-2A 9-4 Pr9-3A 9-3, 9-4, 9-5 Pr9-4A 9-6 Pr9-5A 9-6 Pr9-6A 9-6 Pr9-1B 9-4 Pr9-2B 9-4 Pr9-3B 9-3, 9-4, 9-5 Pr9-4B 9-6 Pr9-5B 9-6 Pr9-6B 9-6 Description dishonor of note receivable Entries for receipt and dishonor of note receivable Difficulty Time AACSB AICPA Moderate 15 min Analytic FN-Measurement Receivable on the balance sheet Accounts receivable turnover and days' sales in receivable Accounts receivable turnover and days' sales in receivable Accounts receivable turnover and days' sales in receivable Accounts receivable turnover Discounting notes receivable Entries for discounting of note receivable and dishonored notes Entries related to uncollectible accounts Aging of receivables; estimating allowance for doubtful accounts Compare two methods of accounting for uncollectible receivables Details of notes receivable and related entries Notes receivable entries Sales and notes receivable transactions Entries related to uncollectible accounts Aging of receivables; estimating allowance for doubtful accounts Compare two methods of accounting for uncollectible receivables Details of notes receivable and related entries Notes receivable entries Sales and notes receivable transactions Easy 5 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Difficult 1 hr Analytic FN-Measurement Difficult 1 hr Analytic FN-Measurement Difficult 1 hr Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement KA Difficult 1 hr Analytic FN-Measurement KA Difficult 1 hr Analytic FN-Measurement Difficult 1 hr Analytic FN-Measurement Moderate 30 min Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement 35 SS GL KA Exl Exl KA Number SA9-1 Objective 9-6 SA9-2 9-4 SA9-3 FAI SA9-4 FAI SA9-5 FAI SA9-6 FAI Description Ethics and professional conduct in business Estimate uncollectible accounts Accounts receivable turnover and days' sales in receivables Difficulty Easy Time 5 min AACSB Ethics AICPA BB-Industry Moderate 30 min Analytic FN-Measurement Difficult 30 min Reflective Thinking BB-Critical Thinking Accounts receivable turnover and days' sales in receivables Accounts receivable turnover and days' sales in receivables Accounts receivable turnover Difficult 1 hr Reflective Thinking BB-Critical Thinking Moderate 30 min Reflective Thinking BB-Critical Thinking Difficult 1 hr Reflective Thinking BB-Critical Thinking 36 SS GL EYE OPENERS 1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or (3) other receivables. 2. Transactions in which merchandise is sold or services are provided on credit generate accounts receivable. 3. a. Current Assets b. Investments 4. Examples of other receivables include interest receivable, taxes receivable, and receivables from officers or employees. 5. Wilson’s should use the direct write-off method because it is a small business that has a relatively small number and volume of accounts receivable. 6. The allowance method 7. Contra asset, credit balance 8. The accounts receivable and allowance for doubtful accounts may be reported at a net amount of $741,456 ($783,150 – $41,694) in the Current Assets section of the balance sheet. In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet. Alternatively, the accounts receivable may be shown at the gross amount of $783,150 less the amount of the allowance for doubtful accounts of $41,694, thus yielding net accounts receivable of $741,456. 9. (1) The percentage rate used is excessive in relationship to the volume of accounts written off as uncollectible; hence, the balance in the allowance is excessive. (2) A substantial volume of old uncollectible accounts is still being carried in the accounts receivable account. 10. An estimate based on analysis of receivables provides the most accurate estimate of the current net realizable value. 11. The advantages of a claim evidenced by a note are that (1) the debt is acknowledged, (2) the payment terms are specified, (3) it is a stronger claim in the event of court action, and (4) it is usually more readily transferable to a creditor in settlement of a debt or to a bank for cash. 12. a. Bauer Company b. Notes Receivable 13. The interest will amount to $6,000 only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note. 14. Debit Accounts Receivable Credit Notes Receivable Credit Interest Revenue 15. Cash.................................6,246.50 Accounts Receivable... 6,200.00 Interest Revenue......... 46.50 ($6,200 × 30/360 × 9% = $46.50) 16. Current Assets 37 ..000 PE 9–1B Aug..............000 30 Accounts Receivable—Manning Wingard. Bad Debt Expense........000 30 Accounts Receivable—Manning Wingard..... 2. Accounts Receivable—Roosevelt McLair.......... .........................PRACTICE EXERCISES PE 9–1A Feb......................................................... 400 23 Cash..... ....000 2............... Nov.....000 30 Cash...................................... Bad Debt Expense........000 2............................. ................000 30 Cash......................................................................750 2..... 7 Cash..... 750 2.. Accounts Receivable—Manning Wingard...... 750 2................. 2..... Bad Debt Expense.......... Allowance for Doubtful Accounts...................000 ....... Accounts Receivable—Manning Wingard...............................750 2......................... June 12 Cash.... 2................. .... 2.....................................000 2.............................................. Accounts Receivable—Manning Wingard...................... 400 575 400 400 PE 9–2A Feb....000 2.... Allowance for Doubtful Accounts..... Bad Debt Expense.................................... 175 400 23 Accounts Receivable—Roosevelt McLair...................... Accounts Receivable—Roosevelt McLair........... Accounts Receivable—Manning Wingard.... June 12 Cash........................... ...PE 9–2B Aug...000).... Accounts Receivable—Roosevelt McLair........................ Accounts Receivable—Roosevelt McLair.....000 + $7. Bad Debt Expense.... Adjusted Balance $500.............. 400 575 400 400 PE 9–3A 1.........000)....000 7.....000 – $5.....200..000 × 0.........800.............. Adjusted Balance $1............... Net realizable value ($1........................................0025) 2...........000 ..........000 31.................. $31..................... Accounts Receivable.. Nov..................000 – $11....... Allowance for Doubtful Accounts ($4..............200.000 × 0.174................200........................... 7 Cash............. 175 400 23 Accounts Receivable—Roosevelt McLair. Allowance for Doubtful Accounts ($31...000) Bad Debt Expense................... 400 23 Cash........ Accounts Receivable....000 26....................000)..005) 2....... Allowance for Doubtful Accounts. Allowance for Doubtful Accounts.....................000 11..................... $7.....000 $489.............................000 ($2.... Net realizable value ($500.......000 $1.000 ($6. 3..... 3..000 – $26........000 PE 9–3B 1........ ......................000). $12...000 34................................ Accounts Receivable..................000 PE 9–4B 1..000 – $4.............000 – $16.....................................000 500 .............................. Interest Revenue..................................... Allowance for Doubtful Accounts........... 31 days November....000 – $34........000 + ($25.......... $25.. Allowance for Doubtful Accounts.............. Adjusted Balance $500.........................500).... 3....000 × 8% × 90/360)] 3........500 39............ The due date for the note is November 8. Net realizable value ($1............000 12......... 8 days Total...............................500 $1............................ 3............................ Adjusted Balance $1... 90 days 2............................... Nov.............................. 21 days (31 – 10) September...................PE 9–4A 1.....................500 [$25............. $39......000 ($16............. determined as follows: August......... 8 Cash.............000 16........ Bad Debt Expense.........500 ($34....................................000) 2.......200. Accounts Receivable..........200................................................. Note Receivable..................... 25..... 30 days October.............. Bad Debt Expense....................000 $484.........165........500 PE 9–5A 1.. Net realizable value ($500..........................000) 2............500 + $5...500 25.................... ...............000 + ($120.........................000 1...400 [$120............................................................................000 × 7% × 60/360)] 3........ 60 days 2................... 121.... 28 days (30 – 2) May...................400 ........ determined as follows: April.............. 1 days Total.. June 1 Cash....................................................... 31 days June..................................... Note Receivable...........400 120............... $121... Interest Revenue.......................... The due date for the note is June 1..............................................PE 9–5B 1.......................................... ....400 21...............400 27 Accounts Receivable—Dr. Ex.......EXERCISES Ex.. Accounts Receivable—Dr... Pete Baker............400 10 Cost of Merchandise Sold. 9–1 Accounts receivable from the U.... Accounts Receivable—Dr...600 21.. 21........S..139 = 27........................... In the December 31........699/$31.... government are significantly different from receivables from commercial aircraft carriers such as Delta and United...............400 8........ since it is difficult to control the creditworthiness of customers entering the casino. Casino operations experience greater bad debt risk than do hotel operations..... Pete Baker...................... 10 Accounts Receivable—Dr.. Hotel accounts and notes receivable: $1....300/$44..................9% c.... 9–2 a... Thus...400 27 Cash............. Boeing should report each type of receivable separately..... 2005................... Bad Debt Expense......400 12... 9–3 Feb....... Bad Debt Expense....000 8..400 ........................................ Pete Baker......... In addition....... individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling... 8..4% b. 12... Ex....600 9 Cash. Sales............... Pete Baker... Casino accounts receivable: $12.......... Merchandise Inventory.......... but discloses each receivable separately in a note to the financial statements..............724 = 5.. July Oct................... Boeing reports the receivables together on the balance sheet.................... filing with the Securities and Exchange Commission.....400 8.... 13...................... 8....... ...........................000 12.....000 2 Cost of Merchandise Sold..............400 15 Cash. Accounts Receivable—Jadelis Resources....... 12.... 12..... $13.......000 Ex.......... Allowance for Doubtful Accounts... Allowance for Doubtful Accounts....................... 9................100) Ex................. $12..... Accounts Receivable—Jadelis Resources.000 16............Ex........... Merchandise Inventory.....000 × 0...........000 30 Cash.. 9–7 Account Ben’s Pickup Shop Bumper Auto Downtown Repair Jake’s Auto Repair Like New Sally’s Uptown Auto Yellowstone Repair & Tow Due Date Number of Days Past Due June 9 July 10 March 18 May 19 June 18 April 12 May 8 April 15 52 (21 + 31) 21 135 (13 + 30 + 31 + 30 + 31) 73 (12 + 30 + 31) 43 (12 + 31) 110 (18 + 31 + 30 + 31) 84 (23 + 30 + 31) 107 (15 + 31 + 30 + 31) ........................750 ($24.....750 ($5....500 – $4..................000 12........ 9–4 June Oct.. 9–5 a.500 b.500 Ex.................... $27...................000 × 0... 2 Accounts Receivable—Lynn Berry... Allowance for Doubtful Accounts........0025) b.400 16... Accounts Receivable—Lynn Berry.......................................500.......500 12.500 12...... 16................ Dec..............................000 30 Accounts Receivable—Lynn Berry.... 9–6 a....... 4......005) d..500............ $32.............000 9......900 ($17....000 12...........650 + $8.. Bad Debt Expense..........500 ($5. Accounts Receivable—Lynn Berry...........600) c............ 12........ Sales................. 12..... 500 113.500 25.290 .325 17.500 50.000 6. 26 Kristi Company 27 Simrill Company 28 Totals 1–30 Over 90 61–90 1 2 1.500 452.000 23 24 25 26 27 56.500 12. Customer Tamika Industries Ruppert Company Welborne Inc.000 2.000 8.500 35.000 452.500 35.000 186.000 6. 9–9 Days Past Due Total receivables Percentage uncollectible Allowance for Doubtful Accounts Balance Not Past Due 1–30 31–60 61–90 Over 90 859.560 9.000 440.000 78. 2 Abell Company Not Past Balance Due 2.000 186.680 75.700 22.700 28 Ex.500 21 Zollo Company 22 Subtotals 23 Tamika Industries 24 Ruppert Company 25 Welborne Inc.700 22 25.500 12.000 772. Kristi Company Simrill Company Due Date August 24 September 3 October 17 November 5 December 3 Number of Days Past Due 98 days (7 + 30 + 31 + 30) 88 days (27 + 31 + 30) 44 days (14 + 30) 25 days Not past due b.300 8.Ex. 9–8 a.500 113. A B C D E F G Aging-of-Receivables Schedule November 30 Days Past Due Customer 1 Aaron Brothers Inc.500 5.800 56.500 21 42.500 31–60 5.025 12.800 31.000 180.500 50.000 1.000 859.700 3% 5% 15% 25% 40% 13. ........ 30 Bad Debt Expense.700 ......................000 2...... 9–11 Age Interval Not past due..................500 $519...................140 69..200 Ex....250 4............................. 9–10 Nov...... 61–90 days past due...200 2........ ($75... 9–12 2008 Dec................................700 17................... 31–60 days past due.. 91–180 days past due............... ($14....................... Allowance for Doubtful Accounts... Total..... Uncollectible accounts estimate.Ex..250 $14.000 12.......000 80....... Uncollectible accounts estimate.................500) 17.................000 1.......000 1% 2 5 10 70 90 $ 4. Estimated Uncollectible Accounts Balance Percent Amount $400.....140 Ex......... Allowance for Doubtful Accounts........... Over 180 days past due........600 900 1..................500 6................... 1–30 days past due................................290 – $6...... 31 Bad Debt Expense..000 18.......150) 69....200 + $3..................... . Accounts Receivable—Beth Chalhoub............. 2..... 9–13 a. Jan.350 950 525 1................ 2.......... Allowance for Doubtful Accounts..... 4.. Bad Debt Expense. 31 Bad Debt Expense.......500 2................ 2........................... 31 Bad Debt Expense... Accounts Receivable—Jennifer Kerlin................. Accounts Receivable—Julie Lindley...000 ................................. Accounts Receivable—B....500 2........... 31 No entry b...... Bad Debt Expense........... 4..........125 725 15................ ($750.......000 7 Accounts Receivable—B.......000 Allowance for Doubtful Accounts..... 15.......... Accounts Receivable—Mark Black........Ex....................... 1...........400 7 Cash... Roberts.................. Accounts Receivable—Carol Castellino.400 1.... Accounts Receivable—Jennifer Kerlin....... Roberts.................................. Accounts Receivable—Carol Castellino............400 3....................................................400 26 Cash.......... Jan................. 31 Allowance for Doubtful Accounts................. Accounts Receivable—Allison Fain..........350 950 525 1......................... Accounts Receivable—B..... 2........... 2................ Accounts Receivable—Julie Lindley..... Roberts..400 12 Bad Debt Expense.400 3........................... Roberts............400 26 Cash.............................400 Dec.....125 725 Dec... July Oct............................. Accounts Receivable—Allison Fain...........500 2......675 2..400 7 Cash......... Accounts Receivable—Mark Black....................................400 12 Allowance for Doubtful Accounts..........000 × 2% = $15....000 7 Accounts Receivable—B.......................400 2...................... 1............000) 1. 2... July Oct. Accounts Receivable—B................... Mar................500 2....................400 2........ Allowance for Doubtful Accounts..... Roberts........ Accounts Receivable—B... Mar...........675 2.......... Accounts Receivable—Beth Chalhoub................................ Roberts......... Uncollectible accounts estimate................... ..........000 $ 6.... 31 No entry 7........675 $ 8........... Direct write-off method ($2.......... Accounts Receivable—Kim Whalen....... 15....325 Shaw’s income would be $8.............. 4.....675)............... 27 Bad Debt Expense.......150 4. Bad Debt Expense.................... Armstrong. Difference ($15...........525 4.......250 8............. Accounts Receivable—Angelina Quan Accounts Receivable—Tammy Newsome Accounts Receivable—Donna Short....... Dec................... Feb...................325 higher under the direct write-off method than under the allowance method....675).........000 – $6......... 7........ 12 Accounts Receivable—L..............850 1.... 9–13 c.........250 12 Cash...............375 2............................ Accounts Receivable—Brad Johnson....................400 + $4....... Accounts Receivable—L.........250 12.210 1....................250 10 Cash..... 9–14 a....... Bad Debts Expense....... Accounts Receivable—L..... Concluded Bad debt expense under: Allowance method...400 + $2......500 7................... 7..250 May Sept............350 Aug........000 – $2. 2 Bad Debt Expense.......690 ............. Armstrong... 7......Ex........ Ex..............400 2.......250 7....... Accounts Receivable—Jill Knapp... Armstrong................ ..... Allowance for Doubtful Accounts... 7. Uncollectible accounts estimate. Adjustment..250 – $12.....675 – $1.. Armstrong.... ($21............. Accounts Receivable—Brad Johnson.........000 40. 9–14 b..500 Estimated Doubtful Accounts Percent 3% 10 20 40 75 Estimated balance of allowance account from aging schedule............. 12 Accounts Receivable—L.....250 Sept......................... Armstrong........675 1.....125* $20........250 12 Cash..... 31 Bad Debt Expense........................875 $21........ Allowance for Doubtful Accounts.............000 3...350 Aug...........125 Amount $ 4............350 + $7..................675 $21.... Accounts Receivable—Kim Whalen........... Continued 2 Allowance for Doubtful Accounts......375 2.............125) 20.............210 1.000 11.. Armstrong.......150 4..250 May 7.250 7..........600 4..................800 4...... 27 Allowance for Doubtful Accounts....550 Computations Aging Class (Number of Days Past Due) 0–30 days 31–60 days 61–90 days 91–120 days More than 120 days Total receivables Receivables Balance on December 31 $160..690 20....... Accounts Receivable—Angelina Quan Accounts Receivable—Tammy Newsome Accounts Receivable—Donna Short................000 – $7....400 2.400 4.....850 1......... Accounts Receivable—L.............Ex...000 6.... Accounts Receivable—Jill Knapp. Allowance for Doubtful Accounts.525 Dec. 7. Feb.........550 4.....500 $235......... 7...... 4....250 – $4...525 = $1.............250 8..... *$18....000 18...250 10 Cash.......550 ... Accounts Receivable—L... 12. Unadjusted credit balance of allowance account............500 7.... .....000 – $61.350 – $7.....675 higher under the direct method than under the allowance method....... Direct write-off method ($7..875 $ 3... Difference ($20...000 [$125...... Ex................000 – ($1........000) + ($66....250 + $4...000 × 3%)] b...000 – $51...........500)] .. $20......500 + $61..550 16........525).200............875).... $7..250 + $12. $139.. 9–16 a.......500 [($54.............. Concluded Bad debt expense under: Allowance method.......550 – $16....000 × 3%)] Ex...800. 9–14 c.000 + $51..000 [$143.. 9–15 $122...675 Kemper’s income would be $3..Ex..500 – ($2.... .000) 60..000 higher in 2008 under the direct write-off method...........................300 4............. Accounts Receivable—Bill Jacks..Ex..... Accounts Receivable—Clarence Watson........000 c..........000 expense under the allowance method vs.. 45..200 20........................... Allowance for Doubtful Accounts.... Accounts Receivable—Matt Putnam............ Accounts Receivable—Matt Putnam.............. 9–17 a.. because bad debt expense would have been $15........... Uncollectible accounts estimate.000 × 3% = $60..000 higher under the allowance method ($60. Bad Debt Expense............................................200 60......................000 expense under the direct write-off method)........ ...... Accounts Receivable—Skip Simon... $45..000 Bad Debt Expense........................ 20.......500 7.......................000 Net income would have been $15... 45.000 13...............................300 4. Allowance for Doubtful Accounts........................ Accounts Receivable—Bill Jacks........ Accounts Receivable—Clarence Watson......000 b.................... ($2...000 13.....500 7. Accounts Receivable—Skip Simon..000.. .........................850 .000 70....................000 – $19.................. ($26.........................000 Estimated Doubtful Accounts Percent 2% 5 15 25 50 Unadjusted debit balance of Allowance for Doubtful Accounts ($18..........000 3...000 30..........000 3........000 10...500 6............................ 19....... Accounts Receivable—Daisy Duke...... Allowance for Doubtful Accounts...... Bad Debt Expense......... Uncollectible accounts estimate.... Accounts Receivable—Boss Hogg........ Amount $ 7.................. Accounts Receivable—Bo Duke.............850 5....300 4........000 25..........850 $ 1..................... Estimated balance of Allowance for Doubtful Accounts from aging schedule........................................000 $26...........850 $27.........................200 27..000) 27...........300 4...500 4...........200 5................ Accounts Receivable—Bo Duke......000 b.......................................000 26. Accounts Receivable—Luke Duke....000)....... 19.....850 Computations Aging Class (Number of Days Past Due) 0–30 days 31–60 days 61–90 days 91–120 days More than 120 days Total receivables Receivables Balance on December 31 $380.... 9–18 a...850 + $1.... Accounts Receivable—Boss Hogg........000 Bad Debt Expense............... Adjustment.....250 5.. Accounts Receivable—Daisy Duke.......500 6..... Accounts Receivable—Luke Duke........000 $515... Allowance for Doubtful Accounts...................600 3.........................500 6...........Ex.......... .....000 × 0. Nov......09% × 90/360) + $30. Interest Revenue. Cost of merchandise returned........ 28 e...... May 5 b................. 7...675 [($30. August 18 (11 + 30 + 31 + 18) b..... Dec..... Sale on account.... 9–19 Due Date a... 2......000] c.......... A sale return or allowance.... 9–20 a....10 × (60/360)] [$5...... Aug.. Cost of merchandise sold for the sale on account... 5......000 × 0..500 × 0.... Payment received from customer for dishonored note plus interest earned after due date.—Holsten Interior Decorators......... 4............ Notes Receivable... Accounts Rec.... . 30..000 675 Ex.. $30.....33 150... 6. July 19 c..000 (2) Cash...........12 × (60/360)] Ex. Note received from customer on account...09 × (60/360)] [$8...... 9–21 1.................00 133... 3......Ex. Note dishonored and charged maturity value of note to customer’s account receivable.675 30..000 × 0.........000 30.... (1) Notes Receivable..........12 × (90/360)] [$18...00 210............00 [$15.....00 600...000 × 0....10 × (120/360)] [$10... 31 d........ 30 Interest $225...... 30....000 × 0.. ....09 × 18/360 = $270)...........................................000 31 Interest Receivable... 60......000 × 0.... 154.....350 60.................................................. Accrued interest ($60................................ Accounts Receivable—Xpedx Company Interest Revenue.............. Notes Receivable..... 270 31 Interest Revenue.........................................000 × 0........Ex.............000 270 270 60.................................. Interest Revenue..................................................... 9–22 2007 Dec..000 3.10 × 30/360 = $1...........275* ............................ Accounts Receivable—Lady Ann’s Co............ 3 Notes Receivable..........000 153... 61.....000 1 Accounts Receivable—Xpedx Company................000 31 Cash.................................................................................................................080* *$60. Notes Receivable.. 153..000 × 0............... 9–23 May Aug.....000 270 1............... 13 Notes Receivable..................... Accounts Receivable—Xpedx Company 150.........................000 150.. Interest Revenue.. 270 12 Cash.....09 × 72/360 Ex....... 2008 Mar.............275 150.... Interest Revenue...000 1............. Income Summary.................................... Interest Receivable.............275 *$153... ........ Notes Receivable................000 450* 24.............. Accounts Receivable—Abode Co.08 × 90/360 = $909 46............ Accounts Receivable—Pynn Co. 1 Notes Receivable........................ It should not be deducted from notes receivable. 9–25 1.......360 29 Cash........... Interest Revenue............. ...359 23 Allowance for Doubtful Accounts..........450 × 0................................... Interest Revenue...000 360* 45.. Interest Revenue......................................................................... 24... The allowance for doubtful accounts should be deducted from accounts receivable............................... 2008 Assets Current assets: Cash...... A corrected partial balance sheet would be as follows: MISHKIE COMPANY Balance Sheet December 31..200 42........000 $529...000 45.. ............................450 17 Accounts Receivable—Abode Co.........000 × 9% × 60/360) 24......... Less allowance for doubtful accounts..Ex.... Accounts Receivable—Pynn Co...............000 18 Notes Receivable.......... ....................500 400... *($45.........................000 487........ Notes Receivable..................... Interest receivable..... 45...... ..360 Ex............................ May July Aug........ .............. Accounts receivable...000 × 6% × 60/360) 45............... ........................................ 2.200 24.....000 24....................000 30 Accounts Receivable—Pynn Co................. 9–24 Mar. Notes receivable.....................................000 . *45....450 909* 24................... The interest receivable should be reported separately as a current asset................... Apr.................. 24. *($24............... $127................... Accounts Receivable—Abode Co..............360 45................................................. 2005: 2004: c.2.414.092.649. industry averages.289)/2] $427.9) 58. the ratios should be compared with industry averages and similar firms.7.7 $9.129.093.460)/2] = $1. [$1. 9–26 a.5/$7.896 6.649.0 days The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 7. Ex.503 $496. Before reaching a definitive conclusion. Net sales Accounts receivable Average accounts receivable Accounts receivable turnover Average daily sales Days’ sales in receivables c. 2005: 2004: b.423.308. both ratios should be compared with those of past years.9 54.093.155 + $1.305. and similar firms.774. Before reaching a more definitive conclusion.308/($8.415/$496.0 to 44.3 ($496.Ex.649.2 {$8.423.155 + $1.289 [($530.394)/2]} 7.129.9 2004 $2.5/($8.5 {$8.055.9 [($463.093.092.415/365) 7.423.259.297/365)] = 44.8 days. 8.155 + $1.0 days [($1.415 $530.654/$427.3) The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 6.5 to 8.165.2 ($3. a favorable trend.092.912.538/365)] = 49.092. and b.305.2 to 6.5.414. The days’ sales in receivables also indicates an increase in the efficiency of collecting accounts receivable by decreasing from 58. The number of days’ sales in receivables decreased from 49.538/[($1.896/$9.297/[($1.259.093.289 + $391.5) ($2.165.896) 6. also indicating a favorable trend.394)/2] = $1.155 + $1. 2005 $3.8 days [($1.558)/2] ($2.055.654/365) ($427. a favorable trend.774.8 days 49.503 + $463.654 $463.9 to 54. also indicating a favorable trend in collections of receivables. [$1. 9–27 a.305. .5 ($3.912.460)/2]} 44.9. 6. The days’ sales in receivables indicates a decrease in the efficiency of collecting accounts receivable by increasing from 4. Before reaching a definitive conclusion.Ex. 2006 $9.408 $128 $119 79. an unfavorable trend. the ratios should be compared with industry averages and similar firms.1 to 62. 2005 $9.699 $182 $155 62. 31.8 [($182 + $128)/2] ($9.6 $26.8. and b.8 4. 29. also indicating an unfavorable trend.408/365) ($119/$25. Jan.6 to 5. .6 5.699/$155) ($9.408/$119) ($9. For the Period Ending Net sales Accounts receivable Average accounts receivable Accounts receivable turnover Average daily sales Days’ sales in receivables c. 9–28 a.6 [($128 + $110)/2] ($9.6) Jan.8) The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 79.699/365) ($155/$26.1 $25. .... because of the extended distribution chain we would expect Heinz’s business customers to take a longer period to pay their receivables.. The average accounts receivable turnover ratios are as follows: The Limited.000 ......... Appendix Ex....... Notes Receivable. 60 days (8 + 31 + 21) c. and other food distributors who eventually sell Heinz products to individual consumers..752 ($82...... Cash.......400 – $1..........J.. Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales...... Accordingly.. 9–29 a...2 + 7............9 [(79..... see Ex...... The Limited operates a specialty retail chain of stores that sell directly to individual consumers...... In contrast.Ex......6)/2] H....1 + 62...752 752 80......648 ($82............. The Limited has the higher average accounts receivable turnover ratio...... grocery store chains..648) e...000 × 9% × 120/360)] b. c.. 9–30 a..... Heinz manufactures processed foods that are sold to food wholesalers....9 [(8.. 9–28.. $80. Interest Revenue..000 + ($80.... $1. Inc.. $82.... Heinz Company: 7.........: 70.... we would expect Heinz’s average accounts receivable turnover ratio to be lower than The Limited as shown in (a)...400 × 12% × 60/360) d.............. Accordingly... b.. 9–27 and Ex...400 [$80.....J...5)/2] Note: For computations of the individual ratios....... 80.... H...... .....700 $100............................... Notes Receivable.....12 × 30/360) = $103......000 + ($100....500 × 0....500 1.......000 × 10% × 60/360)................000 300 $102..........300 Accounts Receivable—Elk Horn.................. 103..... 1 Sept.......500 Cash............................. 100....000 1....525* *$102....000 Cash.................. Interest Revenue................... 1 Notes Receivable..............500 + ($102........... Oct...........000 × 8% × 90/360)...................................525 102.....025 ............. 30 Nov.......... 100.................... 29 100............................ ............................. Cash............... Proceeds..... 9–31 Aug........................Appendix Ex.............................. Discount ($102...... Accounts Receivable—Elk Horn Co...............500 102...................... 102................ Interest Revenue....................000 100....300* *Computations Maturity value $100........... Accounts Receivable—Elk Horn......... ................. 20— July 5 Cash...... 4.. Accounts Receivable—Kirby Co......750 20... Nov...........300 Sept............750 4.... Accounts Receivable—Bart Tiffany.................... ........................750 Dec...........500 1.. .... Accounts Receivable—Maxie Co. 4....... Accounts Receivable—Kommers Co.............. 21 Accounts Receivable—Bart Tiffany..........150 Oct.....750 + $3................ .......... Accounts Receivable—Helena Distributors.............. 9–1A 2...750 2. 21...............700 6..875 21 Cash..150 ............................................. Accounts Receivable—Ski Time Co.........750 6 Cash... ........PROBLEMS Prob............................... Accounts Receivable—Ed Ballantyne............... ...............400) 20.......... 14...... Allowance for Doubtful Accounts........... Allowance for Doubtful Accounts..... 31 Allowance for Doubtful Accounts.. 6....... Allowance for Doubtful Accounts. 4....................275 6 Accounts Receivable—Kirby Co..........600 5........ Allowance for Doubtful Accounts............. ...000 31 Bad Debt Expense.........275 4.....875 19 Allowance for Doubtful Accounts.875 6.... 13............................................................875 4.. ($16............000 4............. .. Accounts Receivable—Dockins Co..150 3........ 4........ Uncollectible accounts estimate........ 126. 31 Adjusting Entry Bad Debt Expense 20.150 3. 31 Unadjusted Balance 3. 1 Balance Oct.240 – $14. $17. a.815 ($7.875 4. $798.750 20. Allowance for Doubtful Accounts July 5 6.550 4.825 ($815.415 ($17.300 Jan. 31 Adj.400 Dec.240 – $16. Balance Dec.000 × 0.Prob. 9–1A Concluded 1.750) 4. $800.815 – $3. $14.415) 12.150 16. 19 6. 21 Dec.275 Sept.750 . 6 Dec.400) c.0025) b.490 ($815. 31 Adjusting Entry Dec.000 Nov. and 2. 31 13. 9. 2007 Jan. 2007 Sept. 1. 6. 28. 2007 Dec. 2008 Number of Days Past Due 193 days (9 + 31 + 31 + 30 + 31 + 30 + 31) 113 days (21 + 31 + 30 + 31) 92 days (31 + 30 + 31) 75 days (14 + 30 + 31) 43 days (12 + 31) 33 days (2 + 31) 30 days Not past due . 9–2A 1. 17. Wintson Company Goofus Bug Sports Due Date June 21. 2007 Sept.Prob. Bailey Sports Prince Sports Cahill Co. 2007 Nov. 30. 2007 Nov. 18. Customer Baitfish Sports & Flies Kiwi Flies Adams Co. 2007 Oct. ..475 14.250 98.250 6......300 29....500 600 950 2...... Not Past Balance Due 15........ 2007 Days Past Due Customer 1 Alexandra Fishery 2 Cutthroat Sports 30 Yellowstone Sports 31 Subtotals 32 Baitfish Sports & Flies 33 Kiwi Flies 34 Adams Co...900 247.150 31 1..171 1–30 31–60 61–90 1 2 5.500 6..900 40 90% 41 9.750 650 1. 35 Bailey Sports 36 Prince Sports 37 Cahill Co.Prob.... ($76.000 15.370 ...171 + $3.800 2% 249.200 895....200 454... 38 Wintson Company 39 Goofus Bug Sports 40 Totals 41 Percent uncollectible Estimate of doubtful 42 accounts 4...510 42 448.000 2.....000 5...900 880..900 25% 32.445 21..900 76.500 5% 101.096 12......475 10...950 650 1...250 Bad Debt Expense.500 600 950 2....000 1...199) 79. 79.. A B C D E F G H 91–120 Over 120 Aging-of-Receivables Schedule December 31...100 45% 30 22..... Uncollectible accounts estimate.750 32 33 34 35 36 37 38 39 23.500 2....600 2.370 Allowance for Doubtful Accounts..170 8......700 10% 33...... 9–2A Concluded 2...000 2... and 3.750 33. 140 ($3. Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account.980 9. based on the percentage of sales. 9–3A 1. The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years on the basis of 3/4% of sales.975 18. For the second year.170 17. The total write-off of receivables originating in the first year amounted to $7.920 $ 6. .825.325 7.470 + $5.130 7.150 Yes. as compared with bad debt expense.825 7. of $6. 2. the comparable amounts were $8.325 3.980.175 9.500 4.850 1.900 $3.600 + $1.Prob.980 $ 3.660 + $980).995 7.750 ($1.680) and $7.980 10.500 + $2. End of Year 1st 2nd 3rd 4th $ 3. ........... Interest Revenue......... 3......................... Jan.016 Dec....... Interest Receivable.........000 36 234** ................................ 31 Interest Receivable..... 26 (b) Interest Due at Maturity $360 ($27................. Notes Receivable........................................................ Notes Receivable.................000 95 55* *$15..................... 5..... Notes Receivable.........000 × 0... 3.. 9–4A 1.. May 2 July 15 Dec..270 27.......... 18 Dec................... Note (a) Due Date 1.......................... Interest Revenue......06 × 22/360 26 Cash..12 × 26/360 27.... 6.... 2........ 22 Jan........06 × 38/360 = $ 95 $27. Interest Receivable..... 18 Accounts Receivable........................ **$27........000 × 30/360 × 12%) 216 ($10....000 × 0.... 2.. Accrued interest..000 × 60/360 × 6%) 270 ($27.. 11.. 22 Cash......................000 × 0........Prob.... 131 10........................000 × 0.......................................... 15.......................000 × 60/360 × 9%) 150 ($15.... 4...........800 216 131 $15.. Interest Revenue...... Interest Revenue......12 × 4/360 = 36 Total $131 4... 30 Jan........000 × 30/360 × 12%) Dec.....000 × 60/360 × 8%) 190 ($19..........150 15...............800 × 120/360 × 6%) 540 ($36.............. ........ 12 Notes Receivable...............000 20... Accounts Receivable.......140 30 Cash............. 20.............................. 15................................. Notes Receivable..............125 20...... Interest Revenue........ 20........................ Interest Revenue............... Notes Receivable................000 3 Cash......... 24........ Notes Receivable......................... 15..225 5 Notes Receivable............. 15..............................Prob....................200 15....................200 30 Notes Receivable......000 1........ 15......................................................... Notes Receivable............................. Interest Revenue........300 4 Notes Receivable.......................000 10 Cash.......000 11 Cash........................................................................................................................................................... Interest Revenue.................................................................000 13 Notes Receivable................................................................ Dec...................................................................................000 300 15........ Notes Receivable.................................000 36..........000 36........000 5 Cash..... Sept......................000 225 24..................................... Nov....................... 24......................................... Accounts Receivable...................................................000 125 . 9–5A June July Aug.... Accounts Receivable................... 36.....000 15.............. 37.......................000 140 15.............................. Accounts Receivable. Accounts Receivable............................000 24................. Interest Revenue................................. ....................................... Interest Revenue........................000 13 Cost of Merchandise Sold.. 6.. Sales....600 × 12% × 30/360 = $306) 30........906 14 Cash..... Sales.............................................................................................. ................ *($16.......750 5 Notes Receivable...... ................................. 30........000 30..................... 16................000 15..................... 16.................... 30.........000 × 6% × 60/360) 16. 9..................... *($6...000 150* ....... Apr..... Feb................................... Accounts Receivable—Centennial Co....... Cash............................... Notes Receivable..000 120* 16...... .000 16.. Interest Revenue.....Prob.......... Notes Receivable....................................................... Merchandise Inventory................000 × 12% × 60/360) 30..............000 9.. Interest Revenue............. Accounts Receivable—Centennial Co..................................... *($30.............000 × 8% × 90/360) 6..000 14 Notes Receivable..... Merchandise Inventory.......... Interest Revenue..........................................................000 6 Accounts Receivable—Kent and Son................750 16......... Mar............... Notes Receivable....................000 15 Notes Receivable..000 600* 30....000 6............................................. Interest Revenue............. Cash....... *($6.........000 6 Cost of Merchandise Sold................................ 9–6A Jan....000 × 10% × 90/360) 6......................................... *($30..........150 6.........................000 13 Accounts Receivable—Centennial Co.............................000 120 4 Cash....... 15..........................................................000 160* 30................ May June July 15 Notes Receivable................. Notes Receivable..600 306* 6.............................160 13 Accounts Receivable—Centennial Co.............................................................000 30................................................................................ .................................600 12 Cash.......... Accounts Receivable—Kent and Son. ...... ........... Merchandise Inventory.......................500 10.... 9....................................................000 ..........................500 20 Cash......900 100 10....000 6...................................................................................... Accounts Receivable—Conover Co... Sales.000 10 Cost of Merchandise Sold................. .......... 10............................. Sales Discounts.......Prob................. 9–6A Aug................... Concluded 10 Accounts Receivable—Conover Co. 6.... ..................................... Accounts Receivable—Combs Co.... Accounts Receivable—Tony Marshal............. ....... Accounts Receivable—Nash Furniture.150 1..................400 13....... Accounts Receivable—Crossroads Co.... Allowance for Doubtful Accounts.. ................050 18 Allowance for Doubtful Accounts..... Allowance for Doubtful Accounts................000 6. ..........050 4....195 Apr....050 21 Cash............ 9–1B 2................................ Uncollectible accounts estimate........500 7.................. Allowance for Doubtful Accounts..........805) 4. 20— Mar.............400 10 Cash....275 4.. Accounts Receivable—Raven Co..................... 2............... 5........ 2.............. 21 Accounts Receivable—Tony Marshal............... 25..... Accounts Receivable—Buffalo Co.. Accounts Receivable—Tony DePuy.................... 4.. 31 Allowance for Doubtful Accounts.. 10 Accounts Receivable—Elden Hickman..................... 17 Cash............720 48....................... 2.. ($58..500 10.............000 2........500 Aug.. 4........ 48.......400 Dec..195 ....................000 – $9.............. .......050 5.... Accounts Receivable—Elden Hickman....Prob............500 Oct. Allowance for Doubtful Accounts...............145 31 Bad Debt Expense.....................400 2............. Apr.805) c.900 + $9.705 ($51. 31 Adjusting Entry Dec.Prob.000 × 0. 10 Dec.145 Oct. 1 Balance 7. $839. 18 Aug.900 ($10. 21 25. 31 Adjusted Balance Dec. and 2.750 – $61. $51.500 Jan. 31 Allowance for Doubtful Accounts 5.000) 4.400 9. 31 Adjusting Entry Bad Debt Expense 48. $842.500 Mar.195 58.195 3. 31 Unadjusted Balance Dec.805 48.750 ($900.000 .705) 41. $61.750 – $58.500 4.005) b.380. 17 Dec. a.050 2. 9–1B Concluded 1.045 ($900. 30. 18. 2007 Nov. 2007 Sept. 1. 9–2B 1. 2007 Nov. 31. 2007 Dec. 3. 29. 2008 Number of Days Past Due 183 days (30 + 31 + 30 + 31 + 30 + 31) 93 days (1 + 31 + 30 + 31) 75 days (14 + 30 + 31) 61 days (30 + 31) 43 days (12 + 31) 31 days 30 days Not past due . 17. 2007 Oct. 2007 Oct. Customer Uniquely Yours Paradise Beauty Store Morgan’s Hair Products Hairy’s Hair Care Superior Images Oh The Hair Mountain Coatings Theatrical Images Due Date July 1. 2007 Jan.Prob. 000 35% 23... and 3..250 98..096 7.....800 2% 198...950 10% 36.000 700 3.550) 51... Balance 20..050 800 2..750 33...... 2007 Days Past Due Customer 1 Daytime Beauty 2 Blount Wigs 30 Zabka’s 31 Subtotals 32 Uniquely Yours 33 Paradise Beauty Store 34 Morgan’s Hair Products 35 Hairy’s Hair Care 36 Superior Images 37 Oh The Hair 38 Mountain Coatings 39 Theatrical Images 40 Totals 41 Percent uncollectible Estimate of doubtful 42 accounts 4...850 18.930 10.900 197.150 1.415 10....200 1.600 2..000 2.000 700 3.950 22..250 4% 102..... 9–2B Concluded 2.......100 15% 31.000 1–30 31–60 61–90 1 2 11....295 5.716 51..680 42 Bad Debt Expense..266 Not Past Due 20...050 800 2.......350 80% 8....500 1.....500 1..900 780..Prob.000 11. Uncollectible accounts estimate.200 404...000 6........ ($61....450 61.......200 1..000 398..716 ..200 796.. Allowance for Doubtful Accounts..000 1.300 29...266 – $9.000 30 31 32 33 34 35 36 37 38 39 40 41 6. A B C D E F G H 91–120 Over 120 Aging-of-Receivables Schedule December 31... End of Year $1.650 $1.900 4.750. the comparable amounts were $4. 9–3B 1.150 3. 2.750 5. The total write-off of receivables originating in the first year amounted to $3.500 8. . For the second year.400 5.850 $ 2.900 2.200 ($600 + $700 + $1.500 + $2.050 Yes.500.500 6. as compared with bad debt expense. Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate 1st 2nd 3rd 4th $ 600 1.Prob. of $2.750 10.900).500 Increase (Decrease) in Amount of Expense Balance of Allowance Account. The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years on the basis of 1/2% of sales.300 ($800 + $1.250 (750) 1.500 3. based on the percentage of sales.000) and $3. .000 × 60/360 × 8%) 780 ($36.............................................. Notes Receivable.... Notes Receivable............................000 × 0...................... $135 ($12.............000 420 300* *$54........ **$36......... 2....... 31 Interest Receivable.....................................................................000 195 585** .000 × 90/360 × 6%) 720 ($54. 4....000 × 0...... Interest Revenue...... Notes Receivable...000 × 45/360 × 9%) 200 ($15.......................... 25 Feb. Accrued interest.........08 × 25/360 Feb.Prob.... July 1 Sept..000 315 615 $420 195 $615 25 Cash...... (b) Interest Due at Maturity Jan........000 × 0... 2...... 3...... 54.................000 × 60/360 × 8%) 315 ($18.13 × 45/360 36.... Interest Revenue......... 7 Oct. 14 Oct.780 36.............................. 30 Dec... 18......... Note (a) Due Date 1..315 Dec......720 54........... Interest Revenue.. 9–4B 1.. 3..............................000 × 60/360 × 13%) 30 Accounts Receivable... 5................... 615 $54....................... 6.......08 × 35/360 = $36.................... Interest Receivable...13 × 15/360 = Total 4............ 18........000 × 0................................... 14 Cash.. Interest Receivable... Interest Revenue..............000 × 90/360 × 7%) 300 ($20.. 3 Jan.... .... 12..................................... 18...................................................................000 50 40................000 10........... 5....... Interest Revenue..........................Prob......................................... Accounts Receivable........................000 31 Cash.....................................050 14 Cash........................................... Accounts Receivable...................000 200 12......000 23 Cash...................................................... 10..... Notes Receivable................... Notes Receivable............................ Accounts Receivable.................................... 10........................................................................ Interest Revenue........ May June July Aug......................000 31 Notes Receivable............ Interest Revenue.......000 10................000 25 Notes Receivable..................000 5........................... 40............. 5............................... 6 Notes Receivable.............000 80 5.000 12..................... Notes Receivable............................ Accounts Receivable.. Accounts Receivable..270 16 Notes Receivable....................000 5 Cash................... Interest Revenue.... 9–5B Mar.... Notes Receivable........................000 270 40....................................................700 18................................ 18..000 700 ........... 12............................. 40............................................ Interest Revenue...................................................................................................................... Notes Receivable........................080 1 Notes Receivable....200 30 Cash.................................................................000 18......... ... 12...00 11 Cash.....................00 3 Cost of Merchandise Sold.00 3 Cash........................................ 14...................... .000......300.......... 12...............800........................................00 13 Cash...................................00 270....................00 3 Accounts Receivable—Kihl’s.......000..... Sales...........00 90........... 9–6B 20— Jan....................... 6.. Merchandise Inventory...Prob..00 12.............00 6.....000...... Cash....................000.........250.................................750.... Accounts Receivable—Dewit Co....... Merchandise Inventory. Sales...............300............... Notes Receivable.00 18................................ 18................................................... 10.......... ..................................270..........00 5 Notes Receivable........250........700..... Accounts Receivable—Kihl’s................. 18...............300.. .............. Interest Revenue....000........ 6..................... Sales Discounts...300.....................00 12..........000..750............ 15.. Mar.... Sales...00 5 Notes Receivable......................................................00 15.... Merchandise Inventory............ Interest Revenue.............................................. Cash............00 ........00 12 Notes Receivable.......000.......................... Notes Receivable....... May June July Sept................ 12.....................000......00 17 Accounts Receivable—Wood Co...................00 15.............464...............................000.....................................00 300.... 18............ 12 Accounts Receivable—Dewit Co............................................00 12 Cost of Merchandise Sold.......300....00 12......................00 18........................ Notes Receivable.00 10.........000.........00 18..800....................00 9.... Interest Revenue.......................00 90. 9...........................................................................00 17 Cost of Merchandise Sold......................................00 6.............00 164............................ 00 9....................00 90.......Prob..........090...129...........................090 × 0...06 × 26/360 = $39..............39 . 9........... Notes Receivable..................... 9................ Concluded 4 Notes Receivable..... .....000... Accounts Receivable—Wood Co........... Interest Revenue.... 9–6B Oct.39)...000................00 9............... ($9. 9...........39 9.................... ......................090.00 39......... ..00 3 Accounts Receivable—Wood Co............ Accounts Receivable—Wood Co.00 29 Cash..................... Interest Revenue... Dec...000...................... However.SPECIAL ACTIVITIES SA 9–1 By computing interest using a 365-day year for depository accounts (payables). . Hence. Neka is behaving in an unprofessional manner. Neka is maximizing interest revenue to the bank. Neka is minimizing interest expense to the bank. federal legislation (Truth in Lending Act) requires banks to compute interest on a 365-day year. By computing interest using a 360-day year for loans (receivables). For example.820) The estimate of 1/4 of 1% of credit sales may be too large. inquiries should be made to determine whether any significant changes between prior years and the current year may have occurred.680 14.460 11.680 + $21. can only be determined after all attempts have been made to collect the receivables on hand at December 31. Note to Instructors: Since the amount of credit sales has been fairly uniform over the years. or perhaps a change to the “estimate based on analysis of receivables” method may be appropriate. could be analyzed. the increase cannot be explained by an expanding volume of sales. The increasing balance of the allowance for doubtful accounts may also be due to the failure to write off a large number of uncollectible accounts. a recent change in credit-granting policies or changes in the general economy (entering a recessionary period. 2008. a recommendation to decrease the annual rate charged as an expense may be in order (perhaps Litespeed Co. perhaps using an aging schedule. . a. 2008.880 13. past write-offs of uncollectible accounts could be analyzed in depth in order to develop a reasonable percentage for future adjusting entries. based on past history. since the allowance for doubtful accounts has steadily increased each year.000 – $15. Also. to determine a reasonable amount of allowance and to determine accounts that should be written off. Addition to Allowance for Doubtful Accounts $20. Based on the preceding analyses. 2008.520 + $21. is experiencing a lower rate of uncollectibles than is the industry average).300 21. The balance of Allowance for Doubtful Accounts that should exist at December 31.610 ($20.400 – $8.840 + $21. for example) could reduce the usefulness of analyzing historical data.680) ($22.750 b.520) ($8.750 – $32. Year 2005 2006 2007 2008 2. b. which might reduce the accuracy of the historical data.300 – $22. Specifically. However.000 21. These possibilities could be evaluated by examining the accounts in the subsidiary ledger for collectibility and comparing the result with the balance in the allowance for doubtful accounts. Accounts Written Off During Year $11.840) ($15. must be exercised in using historical percentages. a.400 21. the account balances at December 31. Caution.SA 9–2 1. however. 4. The accounts receivable turnover indicates a slight increase in the efficiency of collecting accounts receivable by increasing from 75. 2005 Net sales Accounts receivable Average accounts receivable Accounts receivable turnover Average daily sales Days’ sales in receivables $27.433/$359) 75.548 $343 [($375 + $343)/2] $327. a favorable trend.3) 3.548/365) ($327. based upon (1) and (2). .548/$327. a favorable trend.5) ($24.4 $75.5 ($27.2) 4. Best Buy has slightly improved its efficiency in the collection of receivables.8.8 $24.0 to 76. not comparable. 5.3 ($359/$75.SA 9–3 1. For example.5/$67.9 days to 4.9 2004 [($343 + $312)/2] ($24. thus.0 ($27. Based upon accounts receivable turnover ratios. The days’ sales in receivables decreased from 4. if the percentage of credit sales to total sales is not similar or if the percentage changes between periods. Best Buy is more efficient in collection of receivables than is Circuit City during 2005 and 2004. We assumed that the percentage of credit sales to total sales remains constant from one period to the next and is similar for both companies.433/365) $67. then the ratios would be distorted and.433 $375 $359 76. Thus.2 4. and 2. 4. Comparing 2005 and 2004 ratios also reveals favorable trends for Best Buy in contrast to unfavorable trends for Circuit City. 9 days to 21.SA 9–4 1.279/[($774 + $766)/2]} 2.279/365)] = 33.9 days [($774 + $766)/2] = $770. the ratios should be compared with industry averages and similar firms..5. [$770/($8. The days’ sales in receivables decreased from 33. a favorable trend.931/ [($895 + $774)/2]} 2004: 10.9 days 2004: 33.7. Before reaching a more definitive conclusion.8 to 16. 2005: 16. The company with receivables is Ingram Micro. [$834. a favorable trend.5/(13. 2005: 21.9 days [($895 + $774)/2] = $834.9 days 3.8 {$8. . Inc. as described in Apple’s 10-K filing. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 10.9. 4.931/365)] = 21.7 {$13. In contrast. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 41.SA 9–5 1. the accounts receivable turnover ratio for H.J.072/365) 41. Before reaching a more definitive conclusion. the customers of Boeing and Kellogg are other businesses who pay their accounts receivable on a less timely basis.072 $36. 2005 Net sales Accounts receivable Average accounts receivable Accounts receivable turnover Average daily sales Days’ sales in receivables $1.382.033 2004 $1.733 $33.7 ($1.7 to 38.9) 3.202/$33.290.159/$3. the ratios should be compared with industry averages and similar firms.6.290.786.159) $3. For a recent year. Heinz was 8. This is because most of EarthLink’s customers usually charge their monthly bill to MasterCards or VISAs.2 (see Exercise 9–27).786.4 ($1.534. . an unfavorable trend.585)/2] 38.382.733)/2] $33.8 ($33.8 days to 9.4) 8.033 + $30.072/$33.4 ($33.382.9 ($1.4 days.733 + $35. and 2.383 [($36. an unfavorable trend.290.383) $3. EarthLink’s accounts receivable turnover would normally be higher than that of a typical manufacturing company such as Boeing or Kellogg Company.534. 4. The days’ sales in receivables increased from 8.202/365) 9.6 ($1.202 $30.383/$3.159 [($30. the various turnover ratios (rounded to one decimal place) were as follows: Alcoa Inc. In contrast. Caterpillar Barnes & Noble. companies selling to other businesses normally allow a credit period of at least 30 days or longer. Inc. companies with turnover ratios below 15 all sell to other businesses. Inc. Barnes & Noble. Caterpillar The Coca-Cola Company Delta Air Lines The Home Depot IBM Kroger Procter & Gamble Wal-Mart Whirlpool Corporation 2.6 153.6 Based upon (1). .SA 9–6 1. we would expect companies selling directly to consumers to have higher turnover ratios since many customers will charge their purchases on credit cards.2 10.99 100. In contrast.6 65. As of April 2005.2 76 13. The companies with accounts receivable turnover ratios above 15 are all companies selling directly to individual consumers. Inc. Generally. Inc.0 6.8 3. 7.1 20. AutoZone. The Coca-Cola Company Delta Air Lines IBM The Home Depot Procter & Gamble Kroger Whirlpool Corporation Wal-Mart 3. AutoZone.1 6. the companies can be categorized as follows: Accounts Receivable Turnover Ratio Below 15 Above 15 Alcoa Inc. Note to Instructors: The turnover ratios will vary over time.9 59.
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