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RECEIVABLES
EYE OPENERS
1. Receivables are normally classified as (1) written off as uncollectible; hence, the
accounts receivable, (2) notes receivable, or balance in the allowance is excessive.
(3) other receivables. (2) A substantial volume of old uncollectible
2. Transactions in which merchandise is sold accounts is still being carried in the
or services are provided on credit generate accounts receivable account.
accounts receivable. 10. An estimate based on analysis of
3. a. Current Assets receivables provides the most accurate
b. Investments estimate of the current net realizable value.
4. Examples of other receivables include 11. The advantages of a claim evidenced by a
interest receivable, taxes receivable, and note are that (1) the debt is acknowledged,
receivables from officers or employees. (2) the payment terms are specified, (3) it is
5. Gallatin Hardware should use the direct a stronger claim in the event of court action,
write-off method because it is a small and (4) it is usually more readily transferable
business that has a relatively small number to a creditor in settlement of a debt or to a
and volume of accounts receivable. bank for cash.
6. The allowance method 12. a. Tucker Company
7. Contra asset, credit balance b. Notes Receivable
8. The accounts receivable and allowance for 13. The interest will amount to $6,300 only if the
doubtful accounts may be reported at a net note is payable one year from the date it
amount of $266,950 ($298,150 $31,200) in was created. The usual practice is to state
the Current Assets section of the balance the interest rate in terms of an annual rate,
sheet. In this case, the amount of the rather than in terms of the period covered by
allowance for doubtful accounts should be the note.
shown separately in a note to the financial
statements or in parentheses on the balance 14. Debit Accounts Receivable
sheet. Alternatively, the accounts receivable Credit Notes Receivable
may be shown at the gross amount of Credit Interest Revenue
$298,150 less the amount of the allowance 15. Cash................................. 10,285
for doubtful accounts of $31,200, thus Accounts Receivable... 10,200
yielding net accounts receivable of Interest Revenue......... 85
$266,950. ($10,200 30/360 10% = $85)
9. (1) The percentage rate used is excessive 16. Current Assets
in relationship to the volume of accounts
23
PRACTICE EXERCISES
PE 91A
20 Cash...................................................................... 500
Accounts ReceivablePat Roark................ 500
PE 91B
9 Cash...................................................................... 4,000
Accounts ReceivableJason Wilcox.......... 4,000
PE 92A
20 Cash...................................................................... 500
Accounts ReceivablePat Roark................ 500
PE 92B
9 Cash...................................................................... 4,000
Accounts ReceivableJason Wilcox.......... 4,000
PE 93A
Adjusted Balance
2. Accounts Receivable...................................................... $1,400,000
Allowance for Doubtful Accounts ($23,750 $2,250) 21,500
Bad Debt Expense........................................................... 23,750
PE 93B
Adjusted Balance
2. Accounts Receivable...................................................... $750,000
Allowance for Doubtful Accounts ($11,250 + $20,500) 31,750
Bad Debt Expense........................................................... 20,500
Adjusted Balance
2. Accounts Receivable...................................................... $1,400,000
Allowance for Doubtful Accounts.................................. 24,000
Bad Debt Expense........................................................... 26,250
PE 94B
Adjusted Balance
2. Accounts Receivable...................................................... $750,000
Allowance for Doubtful Accounts.................................. 30,000
Bad Debt Expense........................................................... 18,750
PE 95A
1. The due date for the note is July 11, determined as follows:
March................................................................. 18 days (31 13)
April.................................................................... 30 days
May................................................. 31 days
June................................................................... 30 days
July................................................ 11 days
Total............................................................... 120 days
1. The due date for the note is October 23, determined as follows:
September......................................................... 7 days (30 23)
October.............................................................. 23 days
Total............................................................... 30 days
Ex. 91
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,
2007, 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. 92
Ex. 93
Ex. 95
Ex. 96
Ex. 97
b.
A B C D E F G
1 Aging-of-Receivables Schedule
2 November 30
3 Days Past Due
Not Past Over
4 Customer Balance Due 130 3160 6190 90
5 Abbott Brothers Inc. 2,000 2,000
6 Alonso Company 1,500 1,500
Ex. 99
Ex. 911
Estimated
Uncollectible Accounts
Age Interval Balance Percent Amount
Not past due................................................ $567,000 % $ 2,835
130 days past due..................................... 58,000 3 1,740
3160 days past due................................... 29,000 7 2,030
6190 days past due................................... 20,500 15 3,075
91180 days past due................................. 15,000 40 6,000
Over 180 days past due.............................. 10,500 75 7,875
Total......................................................... $700,000 $23,555
Ex. 912
2010
Dec. 31 Bad Debt Expense............................................... 27,700
Allowance for Doubtful Accounts................ 27,700
Uncollectible accounts estimate.
($23,555 + $4,145)
Ex. 913
Ex. 914
Computations
Burritos income would be $17,200 higher under the direct method than under
the allowance method.
Ex. 915
Ex. 916
c. Net income would have been $7,000 higher in 2010 under the direct write-off
method, because bad debt expense would have been $7,000 higher under the
allowance method ($42,000 expense under the allowance method vs. $35,000
expense under the direct write-off method).
Ex. 918
Computations
Ex. 920
Ex. 921
1. Sale on account.
7. Payment received from customer for dishonored note plus interest earned after
due date.
Ex. 922
2009
Dec. 13 Notes Receivable................................................ 84,000
Accounts ReceivablePenick Clothing &
Bags Co. .................................................... 84,000
31 Interest Receivable............................................. 378
Interest Revenue............................................ 378
Accrued interest
($84,000 0.09 18/360 = $378).
31 Interest Revenue................................................. 378
Income Summary........................................... 378
2010
Mar. 12 Cash...................................................................... 85,890
Notes Receivable........................................... 84,000
Interest Receivable........................................ 378
Interest Revenue............................................ 1,512*
*$84,000 0.09 72/360
Ex. 923
Ex. 925
JENNETT COMPANY
Balance Sheet
December 31, 2010
Assets
Current assets:
Cash.............................................................................. $ 95,000
Notes receivable.......................................................... 250,000
Accounts receivable................................................... $398,000
Less allowance for doubtful accounts................ 36,000 362,000
Interest receivable....................................................... 15,000
Appendix Ex. 926
31 Cash........................................................................ 40,120*
Notes Receivable.............................................. 40,000
Interest Revenue............................................... 120
*Computations
Maturity value
$40,000 + ($40,000 8% 90/360).................. $40,800
Discount ($40,800 10% 60/360)..................... 680
Proceeds................................................................ $40,120
c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by
increasing from 7.2 to 8.4, a favorable trend. The days sales in receivables also indicates an increase in the
efficiency of collecting accounts receivable by decreasing from 51.0 to 43.7, also indicating a favorable trend.
Before reaching a definitive conclusion, the ratios should be compared with industry averages and similar
firms.
Ex. 929
c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by
increasing from 8.3 to 9.0, a favorable trend. The number of days sales in receivables decreased from 44.2 to
40.5 days, also indicating a favorable trend in collections of receivables. Before reaching a more definitive
conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.
Ex. 930
a. and b.
For the Period Ending
Feb. 3, Jan. 28,
2007 2006
Net sales $10,671 $9,699
Accounts receivable $176 $182
Average accounts receivable $179 [($176 + $182)/2] $155 [($182 + $128)/2]
Accounts receivable turnover 59.6 ($10,671/$179) 62.6 ($9,699/$155)
Average daily sales $29.2 ($10,671/365) $26.6 ($9,699/365)
Days sales in receivables 6.1 ($179/$29.2) 5.8 ($155/$26.6)
c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by
decreasing from 62.6 to 59.6, an unfavorable trend. The days sales in receivables indicates a decrease in the
efficiency of collecting accounts receivable by increasing from 5.8 to 6.1, also indicating an unfavorable
trend. Before reaching a definitive conclusion, the ratios should be compared with industry averages and
similar firms.
Ex. 931
Note: For computations of the individual ratios, see Ex. 929 and Ex. 930.
b. The Limited has the higher average accounts receivable turnover ratio.
c. The Limited 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 who 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. In addition, we would expect Heinzs business customers to take a
longer period to pay their receivables. Accordingly, we would expect Heinzs
average accounts receivable turnover ratio to be lower than The Limited as
shown in (a).
PROBLEMS
Prob. 91A
2. 20
June 6 Accounts ReceivableIan Netti........................... 1,945
Allowance for Doubtful Accounts................... 1,945
6 Cash........................................................................ 1,945
Accounts ReceivableIan Netti..................... 1,945
1.
Customer Due Date Number of Days Past Due
Sun Coast Beauty May 30, 2009 215 days (1 + 30 + 31 + 31 + 30 + 31 +
30 + 31)
Paradise Beauty Store Sept. 15, 2009 107 days (15 + 31 + 30 + 31)
Helix Hair Products Oct. 17, 2009 75 days (14 + 30 + 31)
Hairys Hair Care Oct. 20, 2009 72 days (11 + 30 + 31)
Surf Images Nov. 18, 2009 43 days (12 + 31)
Oh The Hair Nov. 29, 2009 32 days (1 + 31)
Mountain Coatings Dec. 1, 2009 30 days
Lasting Images Jan. 9, 2010 Not past due
Prob. 92A Concluded
2. and 3.
A B C D E F G H
1 Aging of Receivables Schedule
2 December 31, 2009
3 Days Past Due
Not Past Over
4 Customer Balance Due 130 3160 6190 91120 120
5 Alpha Beauty 20,000 20,000
6 Blonde Wigs 11,000 11,000
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 $6,400 ($1,200 + $1,400 + $3,800), as compared with
bad debt expense, based on the percentage of sales, of $6,500. For the
second year, the comparable amounts were $8,600 ($1,600 + $3,000 + $4,000)
and $8,750.
Prob. 94A
1. (a) (b)
Note Due Date Interest Due at Maturity
1. June 23 $216 ($19,200 45/360 9%)
2. Sept. 13 150 ($11,250 60/360 8%)
3. Oct. 30 756 ($43,200 90/360 7%)
4. Dec. 3 300 ($20,000 90/360 6%)
5. Jan. 25 180 ($13,500 60/360 8%)
6. Feb. 14 468 ($21,600 60/360 13%)
20
Jan. 20 Accounts ReceivableWilding Co. ................. 30,750
Sales................................................................ 30,750
20 Cost of Merchandise Sold.................................. 18,600
Merchandise Inventory.................................. 18,600
2. 20
Feb. 24 Cash........................................................................ 7,200
Allowance for Doubtful Accounts........................ 10,800
Accounts ReceivableBroudy Co. ............... 18,000
1. and 2.
Allowance for Doubtful Accounts
Feb. 24 10,800 Jan. 1 Balance 15,500
Aug. 9 3,600 May 3 1,725
Dec. 31 11,950 Nov. 20 6,140
Dec. 31 Unadjusted Balance 2,985
Dec. 31 Adjusting Entry 20,985
Dec. 31 Adj. Balance 18,000
1.
Customer Due Date Number of Days Past Due
AAA Sports & Flies June 14, 2009 200 days (16 + 31 + 31 + 30 + 31 + 30 + 31)
Blackmon Flies Aug. 30, 2009 123 days (1 + 30 + 31 + 30 + 31)
Charlies Fish Co. Sept. 30, 2009 92 days (31 + 30 + 31)
Firehole Sports Oct. 17, 2009 75 days (14 + 30 + 31)
Green River Sports Nov. 7, 2009 54 days (23 + 31)
Smith River Co. Nov. 28, 2009 33 days (2 + 31)
Wintson Company Dec. 1, 2009 30 days
Wolfe Bug Sports Jan. 6, 2010 Not past due
Prob. 92B Concluded
2. and 3.
A B C D E F G H
1 Aging of Receivables Schedule
2 December 31, 2009
3 Days Past Due
Not Past Over
4 Customer Balance Due 130 3160 6190 91120 120
5 Alder Fishery 15,000 15,000
6 Brown Trout 5,500 5,500
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 $5,350 ($2,600 + $2,000 + $750), as compared with
bad debt expense, based on the percentage of sales, of $5,100. For the
second year, the comparable amounts were $6,560 ($1,100 + $4,200 + $1,260)
and $6,000.
Prob. 94B
1. (a) (b)
Note Due Date Interest Due at Maturity
1. June 3 $400 ($30,000 60/360 8%)
2. July 26 185 ($18,500 30/360 12%)
3. Nov. 2 324 ($16,200 120/360 6%)
4. Dec. 30 540 ($36,000 60/360 9%)
5. Jan. 22 210 ($21,000 60/360 6%)
6. Jan. 26 405 ($40,500 30/360 12%)
26 Cash................................................................ 40,905
Notes Receivable...................................... 40,500
Interest Receivable................................... 54
Interest Revenue...................................... 351*
*$40,500 0.12 26/360
Prob. 95B
Activity 91
Activity 92
1.
a. b.
Addition to Allowance Accounts Written
Year for Doubtful Accounts Off During Year
Activity 93
1. and 2.
2007 2006
Net sales $35,934 $30,848
Accounts receivable $548 $506
Average accounts receivable $527 [($548 + $506)/2] $440.5 [($506 + $375)/2]
Accounts receivable turnover 68.2 ($35,934/$527) 70.0 ($30,848/$440.5)
Average daily sales $98.4 ($35,934/365) $84.5 ($30,848/365)
Days sales in receivables 5.4 ($527/$98.4) 5.2 ($440.5/$84.5)
Activity 94
1. and 2.
2006 2005
Net sales $1,301,267 $1,290,072
Accounts receivable $51,054 $36,033
Average accounts
receivable $43,544 [($51,054 + $36,033)/2] $33,383 [($36,033 + $30,733)/2]
Accounts receivable
turnover 29.9 ($1,301,267/$43,544) 38.6 ($1,290,072/$33,383)
Average daily sales $3,565.1 ($1,301,267/365) $3,534.4 ($1,290,072/365)
Days sales in
receivables 12.2 ($43,544/$3,565.1) 9.4 ($33,383/$3,534.4)
1. Note to Instructors: The turnover ratios will vary over time. Recently, the
various turnover ratios (rounded to one decimal place) were as follows:
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.