CHAPTER 9
RECEIVABLES
DISCUSSION QUESTIONS
1. Receivables are normally classified as (1)
accounts receivable, (2) notes receivable, or
(3) other receivables.
2. Elite Hardware should use the direct writeoff method because it is a small business
that has a relatively small number and volume of accounts receivable.
3. Contra asset, credit balance
4. The accounts receivable and allowance for
doubtful accounts may be reported at a net
amount of $443,700 ($471,200 – $27,500) 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
$471,200 less the amount of the allowance
for doubtful accounts of $27,500, thus yielding net accounts receivable of $443,700.
5. (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.
6.
7.
8.
9.
10.
(2) A substantial volume of old uncollectible
accounts is still being carried in the accounts receivable account.
An estimate based on analysis of receivables provides the most accurate estimate of
the current net realizable value.
a. Kearny Company
b. Notes Receivable
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.
Debit Accounts Receivable
Credit Notes Receivable
Credit Interest Revenue
Cash ................................. 61,155
Accounts Receivable ...
60,750
Interest Revenue .........
405
($60,750 × 30/360
× 8% = $405).
535
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PRACTICE EXERCISES
PE 9–1A
Jan.
Apr.
17 Cash....................................................................
Bad Debt Expense .............................................
Accounts Receivable—Ian Kearns .............
250
750
6 Accounts Receivable—Ian Kearns...................
Bad Debt Expense........................................
750
6 Cash....................................................................
Accounts Receivable—Ian Kearns .............
750
1,000
750
750
PE 9–1B
July
Nov.
7 Cash....................................................................
Bad Debt Expense .............................................
Accounts Receivable—Betty Williams .......
500
2,000
13 Accounts Receivable—Betty Williams ............
Bad Debt Expense........................................
2,000
13 Cash....................................................................
Accounts Receivable—Betty Williams .......
2,000
2,500
2,000
2,000
PE 9–2A
Jan.
Apr.
17 Cash....................................................................
Allowance for Doubtful Accounts ....................
Accounts Receivable—Ian Kearns .............
250
750
6 Accounts Receivable—Ian Kearns...................
Allowance for Doubtful Accounts ...............
750
6 Cash....................................................................
Accounts Receivable—Ian Kearns .............
750
1,000
750
536
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750
PE 9–2B
July
Nov.
7 Cash....................................................................
Allowance for Doubtful Accounts ....................
Accounts Receivable—Betty Williams .......
500
2,000
13 Accounts Receivable—Betty Williams ............
Allowance for Doubtful Accounts ...............
2,000
13 Cash....................................................................
Accounts Receivable—Betty Williams .......
2,000
2,500
2,000
2,000
PE 9–3A
a.
$22,500 ($4,500,000 × 0.005)
b. Accounts Receivable........................................................
Allowance for Doubtful Accounts ($3,900 + $22,500) ....
Bad Debt Expense ............................................................
c.
Net realizable value ($325,000 – $26,400) .......................
Adjusted Balance
$325,000
26,400
22,500
$298,600
PE 9–3B
a.
$80,000 ($32,000,000 × 0.0025)
b. Accounts Receivable........................................................
Allowance for Doubtful Accounts ($80,000 – $9,000)
Bad Debt Expense ............................................................
c.
Net realizable value ($2,500,000 – $71,000) ....................
Adjusted Balance
$2,500,000
71,000
80,000
$2,429,000
537
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PE 9–4A
a.
$21,100 ($25,000 – $3,900)
b. Accounts Receivable.....................................................
Allowance for Doubtful Accounts ................................
Bad Debt Expense .........................................................
c.
Net realizable value ($325,000 – $25,000) ....................
Adjusted Balance
$325,000
25,000
21,100
$300,000
PE 9–4B
a.
$85,000 ($76,000 + $9,000)
b. Accounts Receivable.....................................................
Allowance for Doubtful Accounts ................................
Bad Debt Expense .........................................................
c.
Net realizable value ($2,500,000 – $76,000) .................
Adjusted Balance
$2,500,000
76,000
85,000
$2,424,000
PE 9–5A
a.
The due date for the note is October 8, determined as follows:
September ........................................................
22 days (30 – 8)
October .............................................................
8 days
Total ..............................................................
30 days
b. $90,300 [$90,000 + ($90,000 × 4% × 30/360)]
c.
Oct. 8 Cash .................................................................
Notes Receivable .......................................
Interest Revenue........................................
90,300
538
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90,000
300
PE 9–5B
a.
The due date for the note is July 25, determined as follows:
March ................................................................
4 days (31 – 27)
April ..................................................................
30 days
May ...................................................................
31 days
June ..................................................................
30 days
July ...................................................................
25 days
Total ..............................................................
120 days
b. $152,500 [$150,000 + ($150,000 × 5% × 120/360)]
c.
July 25 Cash .................................................................
Notes Receivable .......................................
Interest Revenue........................................
152,500
150,000
2,500
PE 9–6A
a.
Accounts Receivable
Turnover
Net sales ...............................
Accounts receivable:
Beginning of year ............
End of year .......................
Average accts. receivable ...
2012
$2,430,000
2011
$1,920,000
$180,000
$225,000
$120,000
$180,000
$202,500
$150,000
[($180,000 + $225,000) ÷ 2] [($120,000 + $180,000) ÷ 2]
Accts. receivable turnover
12.0
($2,430,000 ÷ $202,500)
b. Number of Days’ Sales
in Receivables
Net sales ...............................
Average daily sales .............
2012
$2,430,000
$6,657.5
($2,430,000 ÷ 365 days)
Average accts. receivable ...
$202,500
12.8
($1,920,000÷ $150,000)
2011
$1,920,000
$5,260.3
($1,920,000 ÷ 365 days)
$150,000
[($180,000 + $225,000) ÷ 2] [($120,000 + $180,000) ÷ 2]
Number of days’ sales
in receivables ...................
30.4 days
($202,500 ÷ $6,657.5)
28.5 days
($150,000 ÷ $5,260.3)
539
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PE 9–6A
(Concluded)
c. The decrease in the accounts receivable turnover from 12.8 to 12.0 and the
increase in the number of days’ sales in receivables from 28.5 days to 30.4
days indicate unfavorable trends in the efficiency of collecting receivables.
PE 9–6B
a.
Accounts Receivable
Turnover
Net sales ...............................
Accounts receivable:
Beginning of year ............
End of year .......................
Average accts. receivable ...
2012
$4,514,000
2011
$4,200,000
$280,000
$330,000
$320,000
$280,000
$305,000
$300,000
[($280,000 + $330,000) ÷ 2] [($320,000 + $280,000) ÷ 2]
Accts. receivable turnover
14.8
($4,514,000 ÷ $305,000)
b. Number of Days’ Sales
in Receivables
Net sales ...............................
Average daily sales .............
2012
$4,514,000
$12,367.1
($4,514,000 ÷ 365 days)
Average accts. receivable ...
$305,000
14.0
($4,200,000 ÷ $300,000)
2011
$4,200,000
$11,506.8
($4,200,000 ÷ 365 days)
$300,000
[($280,000 + $330,000) ÷ 2] [($320,000 + $280,000) ÷ 2]
Number of days’ sales
in receivables ...................
c.
24.7 days
26.1 days
($305,000 ÷ $12,367.1)
($300,000 ÷ $11,506.8)
The increase in the accounts receivable turnover from 14.0 to 14.8 and the
decrease in the number of days’ sales in receivables from 26.1 days to 24.7
days indicate favorable trends in the efficiency of collecting receivables.
540
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accessible website, in whole or in part.
EXERCISES
Ex. 9–1
Accounts receivable from the U.S. government are significantly different from
receivables from commercial aircraft carriers such as Delta and United. Thus,
Boeing should report each type of receivable separately. In the December 31,
2009, filing with the Securities and Exchange Commission, Boeing reports the receivables together on the balance sheet, but discloses each receivable separately
in a note to the financial statements.
Ex. 9–2
a. The MGM Mirage: 20.9% ($97,106,000 ÷ $465,580,000)
b. Johnson & Johnson: 3.3% ($333,000,000 ÷ $9,979,000,000)
c. Casino operations experience greater bad debt risk, since it is difficult to
control the creditworthiness of customers entering the casino. 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. In contrast, Johnson & Johnson’s customers are primarily
other businesses such as grocery store chains.
Ex. 9–3
Feb.
May
Nov.
13 Accounts Receivable—Dr. Ben Katz..................
Sales ................................................................
120,000
13 Cost of Merchandise Sold ..................................
Merchandise Inventory ..................................
72,000
4 Cash......................................................................
Bad Debt Expense ...............................................
Accounts Receivable—Dr. Ben Katz ............
90,000
30,000
19 Accounts Receivable—Dr. Ben Katz..................
Bad Debt Expense..........................................
30,000
19 Cash......................................................................
Accounts Receivable—Dr. Ben Katz ............
30,000
120,000
72,000
120,000
30,000
541
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30,000
Ex. 9–4
Feb.
11 Accounts Receivable—Dakota Co. .................
Sales ..............................................................
29,000
11 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
17,400
15 Cash....................................................................
Allowance for Doubtful Accounts ....................
Accounts Receivable—Dakota Co. ............
7,500
21,500
3 Accounts Receivable—Dakota Co. .................
Allowance for Doubtful Accounts ...............
21,500
3 Cash....................................................................
Accounts Receivable—Dakota Co. ............
21,500
Bad Debt Expense .........................................................
Accounts Receivable—Aaron Guzman ..................
12,950
b. Allowance for Doubtful Accounts ................................
Accounts Receivable—Aaron Guzman ..................
12,950
Apr.
Sept.
29,000
17,400
29,000
21,500
21,500
Ex. 9–5
a.
12,950
12,950
Ex. 9–6
a. $80,000 ($16,000,000 × 0.005)
b. $82,000 ($77,000 + $5,000)
c. $40,000 ($16,000,000 × 0.0025)
d. $36,000 ($43,500 – $7,500)
Ex. 9–7
Account
Due Date
Number of Days Past Due
Alpha Auto
Best Auto
Downtown Repair
Lucky’s Auto Repair
Pit Stop Auto
Sally’s
Trident Auto
Washburn Repair & Tow
May 15
July 8
March 18
June 1
June 3
April 12
May 31
March 2
77 (16 + 30 + 31)
23 (31 – 8)
135 (13 + 30 + 31 + 30 + 31)
60 (29 + 31)
58 (27 + 31)
110 (18 + 31 + 30 + 31)
61 (30 + 31)
151 (29 + 30 + 31 + 30 + 31)
542
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accessible website, in whole or in part.
Ex. 9–8
a.
Customer
Beltran Industries
Doodle Company
La Corp Inc.
VIP Sales Company
We-Go Company
Due Date
July 10
September 20
October 17
November 4
December 21
Number of Days Past Due
143 days (21 + 31 + 30 + 31 + 30)
71 days (10 + 31 + 30)
44 days (14 + 30)
26 days
Not past due
b.
A
B
C
D
E
F
Aging of Receivables Schedule
November 30
Days Past Due
Not Past
Balance
Due
1–30
31–60
61–90
3,000
3,000
4,500
4,500
1
2
3
4 Customer
5 Able Brothers Inc.
6 Accent Company
21
22
23
24
25
26
27
28
Zumpano Company
Subtotals
Beltran Industries
Doodle Company
La Corp Inc.
VIP Sales Company
We-Go Company
Totals
5,000
830,000
12,000
8,000
17,000
10,000
23,000
900,000
500,000 180,000
5,000
80,000
G
Over
90
45,000
25,000
12,000
8,000
17,000
10,000
23,000
523,000 190,000
97,000
53,000
37,000
Ex. 9–9
Days Past Due
Total receivables
Percentage
uncollectible
Allowance for
Doubtful Accounts
Balance
Not Past
Due
1–30
900,000
523,000
68,130
31–60
61–90
Over
90
190,000
97,000
53,000
37,000
1%
4%
15%
35%
60%
5,230
7,600
14,550
18,550
22,200
543
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accessible website, in whole or in part.
Ex. 9–10
Nov.
30 Bad Debt Expense .............................................
Allowance for Doubtful Accounts ...............
Uncollectible accounts estimate.
($68,130 – $14,280)
53,850
53,850
Ex. 9–11
Age Interval
Balance
Not past due ...............................................
1–30 days past due ....................................
31–60 days past due ..................................
61–90 days past due ..................................
91–180 days past due ................................
Over 180 days past due .............................
Total .......................................................
$600,000
120,000
60,000
45,000
26,000
24,000
$875,000
Estimated
Uncollectible Accounts
Percent
Amount
¼%
2
3
10
40
75
$ 1,500
2,400
1,800
4,500
10,400
18,000
$38,600
Ex. 9–12
2012
Dec. 31
Bad Debt Expense .............................................
Allowance for Doubtful Accounts ...............
Uncollectible accounts estimate.
($38,600 + $1,400)
40,000
544
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40,000
Ex. 9–13
a.
Jan.
27 Bad Debt Expense ................................................
Accounts Receivable—C. Knoll .....................
6,000
Feb. 17 Cash ......................................................................
Bad Debt Expense................................................
Accounts Receivable—Joni Lester ...............
1,000
2,000
Mar.
3 Accounts Receivable—C. Knoll ..........................
Bad Debt Expense ..........................................
6,000
3 Cash ......................................................................
Accounts Receivable—C. Knoll .....................
6,000
6,000
3,000
6,000
6,000
Dec. 31 Bad Debt Expense ................................................ 11,100
Accounts Receivable—Jason Short .............
Accounts Receivable—Kim Snider ...............
Accounts Receivable—Sue Pascall ..............
Accounts Receivable—Tracy Lane ...............
Accounts Receivable—Randy Pape ..............
4,500
1,500
1,100
3,500
500
31 No entry
b. Jan.
27 Allowance for Doubtful Accounts .......................
Accounts Receivable—C. Knoll .....................
6,000
Feb. 17 Cash ......................................................................
Allowance for Doubtful Accounts .......................
Accounts Receivable—Joni Lester ...............
1,000
2,000
Mar.
3 Accounts Receivable—C. Knoll ..........................
Allowance for Doubtful Accounts .................
6,000
3 Cash ......................................................................
Accounts Receivable—C. Knoll .....................
6,000
6,000
3,000
6,000
June 30 Allowance for Doubtful Accounts ....................... 11,100
Accounts Receivable—Jason Short .............
Accounts Receivable—Kim Snider ...............
Accounts Receivable—Sue Pascall ..............
Accounts Receivable—Tracy Lane ...............
Accounts Receivable—Randy Pape ..............
Dec. 31 Bad Debt Expense ................................................ 28,000
Allowance for Doubtful Accounts .................
Uncollectible accounts estimate.
($1,600,000 × 1¾% = $28,000)
545
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6,000
4,500
1,500
1,100
3,500
500
28,000
Ex. 9–13
c.
(Concluded)
Bad debt expense under:
Allowance method .........................................................................
Direct write-off method ($6,000 + $2,000 – $6,000 + $11,100) .....
Difference ($28,000 – $13,100) ......................................................
$28,000
13,100
$14,900
Aprilla Company’s income would be $14,900 higher under the direct write-off
method than under the allowance method.
Ex. 9–14
a.
Mar. 14 Bad Debt Expense ........................................
Accounts Receivable—Myron Rimando
7,500
May
19 Cash ..............................................................
Bad Debt Expense ........................................
Accounts Receivable—Shirley Mason ..
2,000
8,000
7 Accounts Receivable—Myron Rimando ....
Bad Debt Expense ..................................
7,500
7 Cash ..............................................................
Accounts Receivable—Myron Rimando
7,500
Dec. 31 Bad Debt Expense ........................................
Accounts Receivable—Brandon Peele .
Accounts Receivable—Clyde Stringer ..
Accounts Receivable—Ned Berry .........
Accounts Receivable—Mary Adams .....
Accounts Receivable—Gina Bowers ....
33,500
Aug.
7,500
10,000
7,500
7,500
31 No entry
546
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5,000
9,000
13,000
2,000
4,500
Ex. 9–14
b. Mar.
(Continued)
4 Allowance for Doubtful Accounts ...............
Accounts Receivable—Myron Rimando
7,500
19 Cash ..............................................................
Allowance for Doubtful Accounts ...............
Accounts Receivable—Shirley Mason ..
2,000
8,000
7 Accounts Receivable—Myron Rimando ....
Allowance for Doubtful Accounts .........
7,500
7 Cash ..............................................................
Accounts Receivable—Myron Rimando
7,500
Dec. 31 Allowance for Doubtful Accounts ...............
Accounts Receivable—Brandon Peele .
Accounts Receivable—Clyde Stringer ..
Accounts Receivable—Ned Berry .........
Accounts Receivable—Mary Adams .....
Accounts Receivable—Gina Bowers ....
33,500
31 Bad Debt Expense ........................................
Allowance for Doubtful Accounts .........
Uncollectible accounts estimate.
($45,200 – $3,500)
41,700
May
Aug.
7,500
10,000
7,500
7,500
5,000
9,000
13,000
2,000
4,500
41,700
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
$300,000
80,000
20,000
10,000
40,000
$450,000
Estimated Doubtful Accounts
Percent
Amount
1%
$ 3,000
4
3,200
15
3,000
40
4,000
80
32,000
$45,200
Estimated balance of allowance account from aging schedule ......
Unadjusted credit balance of allowance account .............................
Adjustment ...........................................................................................
*$45,000 – $7,500 – $8,000 + $7,500 – $33,500 = $3,500
547
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accessible website, in whole or in part.
$45,200
3,500*
$41,700
Ex. 9–14
c.
(Concluded)
Bad debt expense under:
Allowance method .........................................................................
Direct write-off method ($7,500 + $8,000 – $7,500 + $33,500) .....
Difference........................................................................................
$41,700
41,500
$ 200
Silhouette’s income would be $200 higher under the direct method than under
the allowance method.
Ex. 9–15
$368,000 [$375,000 + $65,000 – ($4,800,000 × 1½%)]
Ex. 9–16
a.
$437,500 [$450,000 + $70,000 – ($5,500,000 × 1½%)]
b. $19,500 [($72,000 – $65,000) + ($82,500 – $70,000)]
Ex. 9–17
a.
Bad Debt Expense .........................................................
Accounts Receivable—Will Boyette .......................
Accounts Receivable—Stan Frey ...........................
Accounts Receivable—Tammy Imes ......................
Accounts Receivable—Shana Wagner ...................
29,000
b. Allowance for Doubtful Accounts ................................
Accounts Receivable—Will Boyette .......................
Accounts Receivable—Stan Frey ...........................
Accounts Receivable—Tammy Imes ......................
Accounts Receivable—Shana Wagner ...................
29,000
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ...........................
Uncollectible accounts estimate.
($3,000,000 × 1½% = $45,000)
45,000
10,000
8,000
5,000
6,000
10,000
8,000
5,000
6,000
45,000
c. Net income would have been $16,000 higher in 2012 under the direct write-off
method, because bad debt expense would have been $16,000 higher under
the allowance method ($45,000 expense under the allowance method vs.
$29,000 expense under the direct write-off method).
548
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accessible website, in whole or in part.
Ex. 9–18
a.
Bad Debt Expense .........................................................
Accounts Receivable—Trey Betts ..........................
Accounts Receivable—Cheryl Carson ...................
Accounts Receivable—Irene Harris ........................
Accounts Receivable—Renee Putman ...................
57,300
b. Allowance for Doubtful Accounts ................................
Accounts Receivable—Trey Betts ..........................
Accounts Receivable—Cheryl Carson ...................
Accounts Receivable—Irene Harris ........................
Accounts Receivable—Renee Putman ...................
57,300
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ...........................
Uncollectible accounts estimate.
($67,500 + $2,300)
69,800
15,500
9,000
29,700
3,100
15,500
9,000
29,700
3,100
69,800
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
$600,000
150,000
75,000
50,000
60,000
$935,000
Estimated Doubtful Accounts
Percent
Amount
1%
$ 6,000
2
3,000
18
13,500
30
15,000
50
30,000
$67,500
Unadjusted debit balance of Allowance for Doubtful
Accounts ($57,300 – $55,000) ...................................
Estimated balance of Allowance for Doubtful
Accounts from aging schedule ................................
Adjustment .....................................................................
$ 2,300
67,500
$69,800
c. Net income would have been $12,500 lower in 2012 under the allowance
method, because bad debt expense would have been $12,500 higher under
the allowance method ($69,800 expense under the allowance method versus
$57,300 expense under the direct write-off method).
549
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accessible website, in whole or in part.
Ex. 9–19
Due Date
a. Aug. 13
b. May 19
c. July 18
d. Nov. 30
e. Dec. 28
Interest
$600
100
120
140
300
[$40,000 × 0.06 × (90/360)]
[$15,000 × 0.04 × (60/360)]
[$24,000 × 0.03 × (60/360)]
[$10,500 × 0.08 × (60/360)]
[$18,000 × 0.05 × (120/360)]
Ex. 9–20
a.
July 8 (21 + 31 + 30 + 8)
b. $91,350 [($90,000 × 6% × 90/360) + $90,000]
c.
(1) Notes Receivable ....................................................
Accounts Rec.—Oregon Interior Decorators
90,000
(2) Cash .........................................................................
Notes Receivable ...............................................
Interest Revenue................................................
91,350
90,000
90,000
1,350
Ex. 9–21
1.
Sale on account.
2.
Cost of merchandise sold for the sale on account.
3.
A sale return or allowance.
4.
Cost of merchandise returned.
5.
Note received from customer on account.
6.
Note dishonored and charged maturity value of note to customer’s account
receivable.
7.
Payment received from customer for dishonored note plus interest earned after due date.
550
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accessible website, in whole or in part.
Ex. 9–22
2011
Dec.
2012
Mar.
10 Notes Receivable ...............................................
Accounts Receivable—Point Loma
Clothing & Bags Co. ...............................
36,000
31 Interest Receivable ............................................
Interest Revenue ..........................................
Accrued interest.
($36,000 × 0.04 × 21/360 = $84)
84
31 Interest Revenue................................................
Income Summary .........................................
84
9 Cash....................................................................
Notes Receivable .........................................
Interest Receivable ......................................
Interest Revenue ..........................................
36,360
36,000
84
84
36,000
84
276*
*$36,000 × 0.04 × 69/360
Ex. 9–23
May
Aug.
3 Notes Receivable .............................................
Accounts Receivable—Sunrider Co. .......
150,000
31 Accounts Receivable—Sunrider Co. ............
Notes Receivable .......................................
Interest Revenue ........................................
153,000
150,000
150,000
3,000*
*$150,000 × 0.06 × 120/360
Oct.
30 Cash..................................................................
Accounts Receivable—Sunrider Co. .......
Interest Revenue ........................................
155,295
*$153,000 × 0.09 × 60/360
551
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accessible website, in whole or in part.
153,000
2,295*
Ex. 9–24
Mar.
Apr.
May
July
Aug.
1 Notes Receivable ...............................................
Accounts Receivable—Tomekia Co. .........
80,000
18 Notes Receivable ...............................................
Accounts Receivable—Mystic Co. .............
75,000
30 Accounts Receivable—Tomekia Co. ...............
Notes Receivable .........................................
Interest Revenue ..........................................
*($80,000 × 6% × 60/360)
80,800
17 Accounts Receivable—Mystic Co. ..................
Notes Receivable .........................................
Interest Revenue ..........................................
*($75,000 × 8% × 60/360)
76,000
29 Cash....................................................................
Accounts Receivable—Tomeka Co. ..........
Interest Revenue ..........................................
*($80,800 × 0.08 × 90/360)
82,416
23 Allowance for Doubtful Accounts ....................
Accounts Receivable—Mystic Co. .............
76,000
80,000
75,000
80,000
800*
75,000
1,000*
80,800
1,616*
76,000
Ex. 9–25
1. The interest receivable should be reported separately as a current asset. It
should not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts receivable.
A corrected partial balance sheet would be as follows:
TULIPS COMPANY
Balance Sheet
December 31, 2012
Assets
Current assets:
Cash ............................................................................
Notes receivable ........................................................
Accounts receivable ..................................................
Less allowance for doubtful accounts ...............
Interest receivable .....................................................
$138,000
400,000
$795,000
14,500
552
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accessible website, in whole or in part.
780,500
20,000
Ex. 9–26
a. and b.
2009
Net sales ................................
Accounts receivable .............
Average accts. receivable ....
$5,018,900
$576,700
$580,850
[($576,700 + $585,000)/2]
Accts. receivable turnover ...
Average daily sales ..............
Days’ sales in receivables ...
c.
2008
$4,880,100
$585,000
$548,450
[($585,000 + $511,900)/2]
8.6
8.9
($5,018,900/$580,850)
($4,880,100/$548,450)
$13,750.4
$13,370.1
($5,018,900/365)
($4,880,100/365)
42.2
41.0
($580,850/$13,750.4)
($548,450/$13,370.1)
The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 8.9 to 8.6, an unfavorable
trend. The days’ sales in receivables also indicates a decrease in the efficiency of collecting accounts receivable by increasing from 41.0 to 42.2, which is
an unfavorable trend. These unfavorable trends are consistent with the economic downturn that occurred worldwide in 2008 and 2009. However, before
reaching a final conclusion, the ratios should be compared with industry averages and similar firms.
Ex. 9–27
a. and b.
Net sales ...............................
Accounts receivable ............
Average accts. receivable ...
2009
2008
$10,148,082
$1,171,797
$1,166,639
$10,070,778
$1,161,481
$1,079,166.5
[($1,171,797 + $1,161,481)/2] [($1,161,481 + $996,852)/2]
Accts. receivable turnover
Average daily sales .............
Days’ sales in receivables ..
8.7
9.3
($10,148,082/$1,166,639)
($10,070,778/$1,079,166.5)
$27,803.0
$27,591.2
($10,148,082/365)
($10,070,778/365)
42.0
($1,166,639/$27,803.0)
39.1
($1,079,166.5/$27,591.2)
553
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accessible website, in whole or in part.
Ex. 9–27
(Concluded)
c. The accounts receivable turnover indicates an decrease in the efficiency of
collecting accounts receivable by decreasing from 9.3 to 8.7, an unfavorable
trend. The number of days’ sales in receivables increased from 39.1 to 42.0
days, also indicating an unfavorable trend in collections of receivables. These
unfavorable trends are consistent with the economic downturn that occurred
worldwide in 2008 and 2009. However, before reaching a final conclusion,
both ratios should be compared with those of past years, industry averages,
and similar firms.
Ex. 9–28
a. and b.
Net sales ................................. $8,632
Accounts receivable ..............
$249
Average accts. receivable .....
$281
Accts. receivable turnover ....
30.7
Average daily sales ............... $23.6
Days’ sales in receivables ....
11.9
For the Period Ending
Jan. 31,
Jan. 31,
2010
2009
$9,043
$313
[($249 + $313)/2] $334 [($313 + $355)/2]
($8,632/$281)
27.1 ($9,043/$334)
($8,632/365)
$24.8 ($9,043/365)
($281/$23.6)
13.5 ($334/$24.8)
c. The accounts receivable turnover indicates an increase in the efficiency of
collecting accounts receivable by increasing from 27.1 to 30.7, a favorable
trend. The days’ sales in receivables indicates an increase in the efficiency of
collecting accounts receivable by decreasing from 13.5 to 11.9, also indicating a favorable trend. Before reaching a conclusion, however, the ratios
should be compared with industry averages and similar firms.
554
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accessible website, in whole or in part.
Ex. 9–29
a.
The average accounts receivable turnover ratios are as follows:
The Limited Brands Inc.: 28.9 [(30.7 + 27.1)/2]
H.J. Heinz Company: 9.0 [(8.7 + 9.3)/2]
Note: For computations of the individual ratios, see Ex. 9–27 and Ex. 9–28.
b. The Limited Brands has the higher average accounts receivable turnover
ratio.
c.
The Limited Brands operates a specialty retail chain of stores that sell directly
to individual consumers. Many of these consumers (retail customers) pay
with MasterCards or VISAs that are recorded as cash sales. In contrast, H.J.
Heinz manufactures processed foods that are sold to food wholesalers,
grocery store chains, and other food distributors that eventually sell Heinz
products to individual consumers. Accordingly, because of the extended
distribution chain, we would expect Heinz to have more accounts receivable
than The Limited Brands. In addition, we would expect Heinz’s business customers to take a longer period to pay their receivables. Accordingly, we would
expect Heinz’s average accounts receivable turnover ratio to be lower than
The Limited Brands as shown in (a).
555
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accessible website, in whole or in part.
PROBLEMS
Prob. 9–1A
2.
20—
Feb. 17 Cash ......................................................................
Allowance for Doubtful Accounts .......................
Accounts Receivable—Gillespie Co. ...........
Apr.
7,500
22,500
30,000
11 Accounts Receivable—Colleen Bertram ............
Allowance for Doubtful Accounts .................
4,250
11 Cash ......................................................................
Accounts Receivable—Colleen Bertram.......
4,250
6 Allowance for Doubtful Accounts .......................
Accounts Receivable—Covered Wagon Co.
9,000
Nov. 20 Accounts Receivable—Dugan Co. .....................
Allowance for Doubtful Accounts .................
5,900
20 Cash ......................................................................
Accounts Receivable—Dugan Co. ...............
5,900
Dec. 31 Allowance for Doubtful Accounts .......................
Accounts Receivable—Kipp Co. ..................
Accounts Receivable—Moore Co. ................
Accounts Receivable—Butte Distributors ....
Accounts Receivable—Parker Towers..........
21,700
31 Bad Debt Expense ................................................
Allowance for Doubtful Accounts .................
Uncollectible accounts estimate.
($60,000 + $3,050)
63,050
July
4,250
4,250
9,000
5,900
5,900
3,000
4,000
8,000
6,700
556
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accessible website, in whole or in part.
63,050
Prob. 9–1A
(Concluded)
1. and 2.
Allowance for Doubtful Accounts
Feb. 17
22,500 Jan.
1 Balance
July
6
9,000 Apr. 11
Dec. 31
21,700 Nov. 20
Dec. 31 Unadjusted Balance
3,050
Dec. 31 Adjusting Entry
Dec. 31 Adj. Balance
Dec. 31 Adjusting Entry
40,000
4,250
5,900
63,050
60,000
Bad Debt Expense
63,050
3.
$1,140,000 ($1,200,000 – $60,000)
4.
a. $56,250 ($7,500,000 × 0.0075)
b. $53,200 ($56,250 – $3,050)
c. $1,146,800 ($1,200,000 – $53,200)
557
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accessible website, in whole or in part.
Prob. 9–2A
1.
Customer
Due Date
Antelope Sports & Flies
Big Hole Flies
Charlie’s Fish Co.
Deschutes Sports
Green River Sports
Smith River Co.
Wild Trout Company
Wolfe Sports
June 21, 2011
Aug. 30, 2011
Sept. 8, 2011
Oct. 20, 2011
Nov. 7, 2011
Nov. 28, 2011
Dec. 5, 2011
Jan. 7, 2012
Number of Days Past Due
193 days (9 + 31 + 31 + 30 + 31 + 30 + 31)
123 days (1 + 30 + 31 + 30 + 31)
114 days (22 + 31 + 30 + 31)
72 days (11 + 30 + 31)
54 days (23 + 31)
33 days (2 + 31)
26 days
Not past due
2. and 3.
A
1
2
3
4 Customer
5 AAA Fishery
6 Blue Ribbon Flies
30
31
32
33
34
35
36
37
38
39
40
41
B
C
D
E
F
G
Aging of Receivables Schedule
December 31, 2011
Days Past Due
Not Past
Balance
Due
1–30
31–60
61–90
91–120
20,000
20,000
7,500
7,500
Z Fish Co.
4,000
Subtotals
1,060,00
Ant. Sports & Flies
3,0000
Big Hole Flies
6,500
FliesFlies
Charlie’s Fish Co.
12,000
Deschutes Sports
4,000
Green River Sports
3,500
Smith River Co.
1,500
Wild Trout Company
5,000
Wolfe Sports
4,500
Totals
1,100,00
0
Percent uncollectible
Estimate of
42
uncollectible accounts 111,095
500,000
4,000
315,000
120,000
40,000
25,000
H
Over
120
60,000
3,000
6,500
12,000
4,000
3,500
1,500
5,000
4,500
504,500
1%
320,000
4%
125,000
8%
44,000
25%
37,000
45%
5,045
12,800
10,000
11,000
16,650
558
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accessible website, in whole or in part.
69,500
80%
55,6
00
Prob. 9–2A
4.
(Concluded)
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ...........................
Uncollectible accounts estimate.
($111,095 + $1,405)
112,500
112,500
5. On the balance sheet, assets would be overstated by $112,500 since the allowance of doubtful accounts would be understated by $112,500. In addi
6. tion, the owner’s capital account would be overstated by $112,500 since
bad debt expense would be understated and net income overstated by
$112,500 on the income statement.
559
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accessible website, in whole or in part.
Prob. 9–3A
1.
Bad Debt Expense
Year
Expense
Actually
Reported
Expense
Based on
Estimate
Increase
(Decrease)
in Amount
of Expense
Balance of
Allowance
Account,
End of Year
1st
2nd
3rd
4th
$2,000
3,400
6,450
9,200
$ 5,250
6,750
9,000
15,000
$3,250
3,350
2,550
5,800
$ 3,250
6,600
9,150
14,950
2. Yes. 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. The total write-off of receivables originating in
the first year amounted to $4,800 ($2,000 + $1,800 + $1,000), as compared with
bad debt expense, based on the percentage of sales, of $5,250. For the second year, the comparable amounts were $6,560 ($1,600 + $3,700 + $1,260) and
$6,750.
560
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accessible website, in whole or in part.
Prob. 9–4A
1.
2.
3.
Note
(a)
Due Date
1.
2.
3.
4.
5.
6.
June 9
July 24
Oct. 29
Dec. 30
Jan. 14
Jan. 26
Oct.
(b)
Interest Due at Maturity
$300 ($45,000 × 60/360 × 4%)
90 ($18,000 × 30/360 × 6%)
720 ($36,000 × 120/360 × 6%)
540 ($36,000 × 60/360 × 9%)
540 ($54,000 × 60/360 × 6%)
135 ($40,500 × 30/360 × 4%)
29 Accounts Receivable ...................................
Notes Receivable ....................................
Interest Revenue .....................................
36,720
Dec. 31 Interest Receivable ......................................
Interest Revenue .....................................
Accrued interest.
432
36,000
720
432
$54,000 × 0.06 × 46/360 = $414
$40,500 × 0.04 × 4/360 =
18
Total
$432
4.
Jan.
14 Cash ..............................................................
Notes Receivable ....................................
Interest Receivable .................................
Interest Revenue .....................................
54,540
54,000
414
126*
*$54,000 × 0.06 × 14/360
26 Cash ..............................................................
Notes Receivable ....................................
Interest Receivable .................................
Interest Revenue .....................................
40,635
*$40,500 × 0.04 × 26/360
561
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accessible website, in whole or in part.
40,500
18
117*
Prob. 9–5A
June
July
Aug.
Sept.
Nov.
Dec.
3 Notes Receivable ...............................................
Accounts Receivable ...................................
24,000
26 Notes Receivable ...............................................
Accounts Receivable ...................................
27,000
2 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
24,160
4 Notes Receivable ...............................................
Accounts Receivable ...................................
60,000
3 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
60,300
5 Notes Receivable ...............................................
Accounts Receivable ...................................
36,000
23 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
27,450
30 Notes Receivable ...............................................
Accounts Receivable ...................................
18,000
5 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
36,210
30 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
18,075
24,000
27,000
24,000
160
60,000
60,000
300
36,000
27,000
450
18,000
36,000
210
562
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accessible website, in whole or in part.
18,000
75
Prob. 9–6A
Jan.
Feb.
Mar.
Apr.
May
July
Aug.
5 Notes Receivable ...............................................
Cash ..............................................................
17,500
4 Accounts Receivable—Tedra & Co. ................
Sales ..............................................................
19,000
4 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
11,000
13 Accounts Receivable—Centennial Co. ...........
Sales ..............................................................
30,000
13 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
17,600
6 Notes Receivable ...............................................
Accounts Receivable—Tedra & Co. ..........
19,000
14 Notes Receivable ...............................................
Accounts Receivable—Centennial Co. .....
30,000
5 Notes Receivable ...............................................
Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
*($17,500 × 8% × 90/360)
17,500
350
5 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
*($19,000 × 6% × 60/360)
19,190
13 Accounts Receivable—Centennial Co. ...........
Notes Receivable .........................................
Interest Revenue ..........................................
*($30,000 × 9% × 60/360)
30,450
12 Cash....................................................................
Accounts Receivable—Centennial Co. .....
Interest Revenue ..........................................
*($30,450 × 12% × 60/360)
31,059
3 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
*($17,500 × 9% × 120/360)
18,025
17,500
19,000
11,000
30,000
17,600
19,000
30,000
17,500
350*
19,000
190*
30,000
450*
30,450
609*
563
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accessible website, in whole or in part.
17,500
525*
Prob. 9–6A
Sept.
(Concluded)
7 Accounts Receivable—Lock-It Co. .......................
Sales ....................................................................
9,000
7 Cost of Merchandise Sold ......................................
Merchandise Inventory ......................................
5,000
17 Cash..........................................................................
Sales Discounts .......................................................
Accounts Receivable—Lock-It Co. ..................
8,910
90
9,000
5,000
564
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accessible website, in whole or in part.
9,000
Prob. 9–1B
2.
20—
Mar. 15 Accounts Receivable—Brad Atwell ....................
Allowance for Doubtful Accounts .................
3,750
3,750
15 Cash ......................................................................
Accounts Receivable—Brad Atwell ..............
3,750
20 Allowance for Doubtful Accounts .......................
Accounts Receivable—Glory Rigging Co. ...
15,000
Aug. 13 Cash ......................................................................
Allowance for Doubtful Accounts .......................
Accounts Receivable—Coastal Co. .............
7,200
10,800
May
Sept.
3,750
15,000
18,000
2 Accounts Receivable—Lorie Kidd ......................
Allowance for Doubtful Accounts .................
6,500
2 Cash ......................................................................
Accounts Receivable—Lorie Kidd ................
6,500
Dec. 31 Allowance for Doubtful Accounts .......................
Accounts Receivable—Kimbro Co. ..............
Accounts Receivable—McHale Co. ..............
Accounts Receivable—Summit Furniture ....
Accounts Receivable—Wes Riggs ................
21,000
31 Bad Debt Expense ................................................
Allowance for Doubtful Accounts .................
Uncollectible accounts estimate.
48,050
6,500
6,500
9,000
2,500
7,500
2,000
($50,000 – $1,950)
565
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accessible website, in whole or in part.
48,050
Prob. 9–1B
(Concluded)
1. and 2.
May 20
Aug. 13
Dec. 31
Allowance for Doubtful Accounts
15,000 Jan.
1 Balance
10,800 Mar. 15
21,000 Sept. 2
Dec. 31 Unadjusted Balance
Dec. 31 Adjusting Entry
Dec. 31 Adjusted Balance
Dec. 31 Adjusting Entry
38,500
3,750
6,500
1,950
48,050
50,000
Bad Debt Expense
48,050
3.
$1,830,000 ($1,880,000 – $50,000)
4.
a. $48,000 ($9,600,000 × 0.005)
b. $49,950 ($48,000 + $1,950)
c. $1,830,050 ($1,880,000 – $49,950)
566
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accessible website, in whole or in part.
Prob. 9–2B
1.
Customer
Due Date
Number of Days Past Due
Shining Beauty
May 28, 2009
Paradise Beauty Store
Amazing Hair Products
Hairy’s Hair Care
Golden Images
Oh The Hair
All About Hair
Lasting Images
Sept. 7, 2011
Oct. 17, 2011
Oct. 24, 2011
Nov. 23, 2011
Nov. 29, 2011
Dec. 2, 2011
Jan. 5, 2012
217 days (3 + 30 + 31 + 31 + 30 + 31 +
30 + 31)
115 days (23 + 31 + 30 + 31)
75 days (14 + 30 + 31)
68 days (7 + 30 + 31)
38 days (7 + 31)
32 days (1 + 31)
29 days
Not past due
2. and 3.
A
1
2
3
4
5
6
30
31
32
33
34
35
36
37
38
39
40
41
Customer
Absolute Beauty
Blonde Wigs
Zensational Beauty
Subtotals
Shining Beauty
Paradise Beauty Store
Amazing Hair Products
Hairy’s Hair Care
Golden Images
Oh The Hair
All About Hair
Lasting Images
Totals
Percent uncollectible
Estimate of
42 uncollectible accounts
B
C
D
E
F
G
Aging of Receivables Schedule
December 31, 2011
Days Past Due
Not Past
Balance
Due
1–30
31–60
61–90
91–120
15,000
15,000
8,000
8,000
3,000
700,000
4,000
7,000
1,000
1,500
1,600
3,500
4,000
9,400
732,000
72,290
287,000
3,000
180,000
150,000
40,000
18,000
H
Over
120
25,000
4,000
7,000
1,000
1,500
1,600
3,500
4,000
9,400
296,400
2%
184,000
5%
155,100
12%
42,500
16%
25,000
40%
29,000
75%
5,928
9,200
18,612
6,800
10,000
21,750
567
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accessible website, in whole or in part.
Prob. 9–2B
4.
(Concluded)
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ...........................
Uncollectible accounts estimate.
($72,290 – $3,040)
69,250
69,250
5. On the balance sheet, assets would be overstated by $69,250 since the allowance of doubtful accounts would be understated by $69,250. In addition, the
owner’s capital account would be overstated by $69,250 since bad debt
expense would be understated and net income overstated by $69,250 on the
income statement.
568
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accessible website, in whole or in part.
Prob. 9–3B
1.
Bad Debt Expense
Year
1st
2nd
3rd
4th
Expense
Actually
Reported
$ 1,300
3,600
13,500
17,700
Expense
Based on
Estimate
$ 7,000
10,000
15,000
18,000
Increase
(Decrease)
in Amount
of Expense
$5,700
6,400
1,500
300
Balance of
Allowance
Account,
End of Year
$ 5,700
12,100
13,600
13,900
2. Yes. 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. The total write-off of receivables originating in
the first year amounted to $6,800 ($1,300 + $1,500 + $4,000), as compared with
bad debt expense, based on the percentage of sales, of $7,000. For the second year, the comparable amounts were $9,400 ($2,100 + $3,300 + $4,000) and
$10,000.
569
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Prob. 9–4B
1.
2.
3.
Note
(a)
Due Date
(b)
Interest Due at Maturity
1.
2.
3.
4.
5.
6.
June 2
July 3
Nov. 5
Dec. 3
Jan. 20
Feb. 14
$100 ($15,000 × 60/360 × 4%)
432 ($57,600 × 45/360 × 6%)
625 ($50,000 × 90/360 × 5%)
300 ($20,000 × 90/360 × 6%)
360 ($27,000 × 60/360 × 8%)
216 ($21,600 × 60/360 × 6%)
Nov.
5 Accounts Receivable ...................................
Notes Receivable ....................................
Interest Revenue .....................................
50,625
Dec. 31 Interest Receivable ......................................
Interest Revenue .....................................
Accrued interest.
294
$27,000 × 0.08 × 40/360 =
$21,600 × 0.06 × 15/360 =
Total
4.
Jan.
50,000
625
294
$240
54
$294
20 Cash ..............................................................
Notes Receivable ....................................
Interest Receivable .................................
Interest Revenue .....................................
27,360
27,000
240
120*
*$27,000 × 0.08 × 20/360
Feb. 14 Cash ..............................................................
Notes Receivable ....................................
Interest Receivable .................................
Interest Revenue .....................................
21,816
*$21,600 × 0.06 × 45/360
570
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accessible website, in whole or in part.
21,600
54
162*
Prob. 9–5B
Mar.
Apr.
May
June
July
Aug.
1 Notes Receivable ...............................................
Accounts Receivable ...................................
90,000
25 Notes Receivable ...............................................
Accounts Receivable ...................................
10,000
30 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
90,900
16 Notes Receivable ...............................................
Accounts Receivable ...................................
36,000
31 Notes Receivable ...............................................
Accounts Receivable ...................................
25,000
23 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
10,100
30 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
25,125
1 Notes Receivable ...............................................
Accounts Receivable ...................................
28,000
31 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
28,210
14 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
36,630
90,000
10,000
90,000
900
36,000
25,000
10,000
100
25,000
125
28,000
28,000
210
571
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accessible website, in whole or in part.
36,000
630
Prob. 9–6B
20—
Jan.
Mar.
May
June
July
13 Accounts Receivable—Boylan Co. .................
Sales ..............................................................
32,000
13 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
19,200
10 Notes Receivable ...............................................
Accounts Receivable—Boylan Co. ............
32,000
9 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
32,320
10 Accounts Receivable—Holen ...........................
Sales ..............................................................
18,000
10 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
10,000
15 Notes Receivable ...............................................
Cash ..............................................................
24,000
20 Cash....................................................................
Sales Discounts .................................................
Accounts Receivable—Holen......................
17,640
360
15 Notes Receivable ...............................................
Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
24,000
140
32,000
19,200
32,000
32,000
320
18,000
10,000
24,000
18,000
24,000
140*
*($24,000 × 7% × 30/360)
Sept. 13 Cash....................................................................
Notes Receivable .........................................
Interest Revenue ..........................................
24,360
24,000
360*
*($24,000 × 9% × 60/360)
13 Accounts Receivable—Aztec Co. ....................
Sales ..............................................................
40,000
13 Cost of Merchandise Sold ................................
Merchandise Inventory ................................
25,000
40,000
25,000
572
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accessible website, in whole or in part.
Prob. 9–6B
Oct.
Dec.
(Concluded)
12 Notes Receivable ...............................................
Accounts Receivable—Aztec Co. ..............
40,000
11 Accounts Receivable—Aztec Co. ....................
Notes Receivable .........................................
Interest Revenue ..........................................
40,400
40,000
40,000
400*
*($40,000 × 6% × 60/360)
26 Cash....................................................................
Accounts Receivable—Aztec Co. ..............
Interest Revenue ..........................................
40,602
40,400
202*
*($40,400 × 12% × 15/360)
573
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CASES & PROJECTS
CP 9–1
By computing interest using a 365-day year for depository accounts (liabilities),
Stacey is minimizing interest expense to the bank. By computing interest using a
360-day year for loans (assets), Stacey is maximizing interest revenue to the
bank. However, federal legislation (Truth in Lending Act) requires banks to compute interest on a 365-day year. Hence, Stacey is behaving in an unprofessional
manner.
CP 9–2
1.
2.
Year
a.
Addition to Allowance
for Doubtful Accounts
2009
2010
2011
2012
$7,500
7,875
8,500
9,500
a.
b.
Accounts Written
Off During Year
$4,300
5,575
6,000
7,200
($7,500 – $3,200)
($3,200 + $7,875 – $5,500)
($5,500 + $8,500 – $8,000)
($8,000 + $9,500 – $10,300)
The estimate of 1/4 of 1% of credit sales may be too large, since the
allowance for doubtful accounts has steadily increased each year. 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.
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.
Note to Instructors: Since the allowance for doubtful accounts increased by over
200% [($10,300 – $3,200)/$3,200] while sales have increased by only 27%
[($3,800,000 – $3,000,000/$3,000,000], the increase cannot be explained by an expanding volume of sales.
574
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CP 9–2
(Concluded)
b. The balance of Allowance for Doubtful Accounts that should exist at
December 31, 2012, can only be determined after all attempts have been
made to collect the receivables on hand at December 31, 2012. However,
the account balances at December 31, 2012, could be analyzed, perhaps
using an aging schedule, to determine a reasonable amount of allowance
and to determine accounts that should be written off. Also, 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.
Caution, however, must be exercised in using historical percentages.
Specifically, inquiries should be made to determine whether any significant changes between prior years and the current year may have occurred, which might reduce the accuracy of the historical data. For example, a recent change in credit-granting policies or changes in the general
economy (entering a recessionary period, for example) could reduce the
usefulness of analyzing historical data.
Based on the preceding analyses, a recommendation to decrease the
annual rate charged as an expense may be in order (perhaps Dolphin Co.
is experiencing a lower rate of uncollectibles than is the industry
average), or perhaps a change to the “estimate based on analysis of
receivables” method may be appropriate.
CP 9–3
1. and 2.
2009
2008
Net sales .................................... $45,015
$40,023
Accounts receivable .................
$1,868
$549
Average accounts receivable... $1,208.5 [($1,868 + $549)/2] $548.5 [($549 + $548)/2]
Accounts receivable turnover ..
37.2 ($45,015/$1,208.5)
73.0 ($40,023/$548.5)
Average daily sales ..................
$123.3 ($45,015/365)
$109.7 ($40,023/365)
Days’ sales in receivables ........
9.8 ($1,208.5/$123.3)
5.0 ($548.5/$109.7)
3.
The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 73.0 to 37.2, an unfavorable
trend. The days’ sales in receivables increased from 5.0 days to 9.8, an unfavorable trend. Thus, based on (1) and (2), Best Buy has decreased its
efficiency in the collection of receivables.
575
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CP 9–3
4.
(Concluded)
We assumed that the percentage of credit sales to total sales remains constant from one period to the next and no major changes in operations
occurred between years. For example, if the percentage of credit sales to total
sales is not similar or if the percentage changes between years, then the ratios would be distorted and, thus, not comparable. Also, any major changes in
operations could distort the comparison between years, which is the case of
Best Buy, as described below.
During fiscal year 2009, Best Buy expanded its operations in Europe by purchasing The Carphone Warehouse Group (CWG), which was one of Europe’s
largest mobile phone retailers. The acquisition resulted in transferring $1,186
of additional accounts receivable from CWG to Best Buy. Assuming that the
amount of these additional receivables did not change significantly during the
year, the accounts receivable turnover ratio and number of days’ sales in receivables for fiscal year 2009 would be as follows:
Net sales ........................................
Accounts receivable .....................
Average accounts receivable.......
Accounts receivable turnover ......
Average daily sales ......................
Days’ sales in receivables ............
$45,015
$682
$615.5
73.1
$123.3
5.0
($1,868 – $1,186)
[($682 + $549)/2]
($45,015/$615.5)
($45,015/365)
($615.5/$123.3)
Adjusting for the acquisition of CWG makes Best Buy’s accounts receivable
turnover and number of days’ sales in receivables comparable between years
as shown below.
2009
2008
Accounts receivable turnover ......................
73.1
73.0
Number of days’ sales in receivables ..........
5.0
5.0
The preceding indicates that Best Buy’s efficiency in collecting its preacquisition receivables remained approximately the same during 2009 and
2008.
CP 9–4
1.
2009: 12.6 {$36,537/[($3,361 + $2,422)/2]}
2008: 16.0 {$32,479/[($2,422 + $1,637)/2]}
2.
2009: 28.9 days [($3,361 + $2,422)/2] = $2,891.5; [$2,891.5/($36,537/365)]
2008: 22.8 days [($2,422 + $1,637)/2] = $2,029.5; [$2,029.5/($32,479/365)]
576
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CP 9–4
3.
(Concluded)
The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 16.0 to 12.6, an unfavorable
trend. The days’ sales in receivables increased from 22.8 days to 28.9, an unfavorable trend. Before reaching a more definitive conclusion, the ratios
should be compared with industry averages and similar firms.
CP 9–5
1. and 2.
Net sales ...........................
Accounts receivable ........
Average accounts
receivable .....................
Accounts receivable
turnover ........................
Average daily sales ..........
Days’ sales in
receivables ...................
2009
$723,229
66,623
2008
$955,577
50,823
$58,723.0 [($66,623 + $50,823)/2] $46,153.0 [($50,823 + $41,483)/2]
12.3 ($723,229/$58,723.0)
$1,981.4 ($723,229/365)
20.7 ($955,577/$46,153.0)
$2,618.0 ($955,577/365)
29.6 ($58,723.0/$1,981.4)
17.6 ($46,153.0/$2,618.0)
3. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 20.7 to 12.3, an unfavorable
trend. The days’ sales in receivables increased from 17.6 days to 29.6 days,
an unfavorable trend. Before reaching a more definitive conclusion, the ratios
should be compared with industry averages and similar firms.
Note to Instructors: Earthlink discontinued its municipal wireless broadband
operations during 2008, which may have affected the comparison of the ratios
for 2009 and 2008.
4.
EarthLink’s accounts receivable turnover would normally be higher than that
of a typical manufacturing company such as Boeing or Kellogg Company.
This is because most of EarthLink’s customers usually charge their monthly
bill to MasterCards or VISAs. In contrast, the customers of Boeing and
Kellogg are other businesses that pay their accounts receivable on a less
timely basis. For a recent year, the accounts receivable turnover ratio for H.J.
Heinz was 8.7 (see Ex. 9–27).
577
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CP 9–6
1.
Note to Instructors: The turnover ratios will vary over time. Recently, the various turnover ratios (rounded to one decimal place) were as follows:
Alcoa Inc.
AutoZone, Inc.
Barnes & Noble, Inc.
Caterpillar
The Coca-Cola Company
Delta Air Lines
The Home Depot
IBM
Kroger
Procter & Gamble
Wal-Mart
Whirlpool Corporation
7.7
68.9
54.4
1.9
9.1
17.0
68.4
3.3
82.8
10.0
101.4
6.2
Based on the above, the companies can be categorized as follows:
Accounts Receivable Turnover Ratio
Below 15
Above 15
Alcoa Inc.
AutoZone, Inc.
Caterpillar
Barnes & Noble, Inc.
The Coca-Cola Company
Delta Air Lines
IBM
The Home Depot
Procter & Gamble
Kroger
Whirlpool Corporation
Wal-Mart
2. The companies with accounts receivable turnover ratios above 15 are all
companies selling directly to individual consumers. In contrast, companies
with turnover ratios below 15 all sell to other businesses. Generally, we would
expect companies selling directly to consumers to have higher turnover
ratios since many customers will charge their purchases on credit cards. In
contrast, companies selling to other businesses normally allow a credit
period of at least 30 days or longer.
578
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