chapter 09 - financial accounting

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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 write-off method because it is a small business that has a relatively small number and vol-ume 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 allow-ance for doubtful accounts should be shown separately in a note to the financial state-ments 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 yield-ing 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.

(2) A substantial volume of old uncollectible accounts is still being carried in the ac-counts receivable account.

6. An estimate based on analysis of receiv-ables provides the most accurate estimate of the current net realizable value.

7. a. Kearny Company b. Notes Receivable 8. 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.

9. Debit Accounts Receivable Credit Notes Receivable Credit Interest Revenue

10. Cash ................................. 61,155 Accounts Receivable... 60,750 Interest Revenue ......... 405 ($60,750 30/360 8% = $405).



PRACTICE EXERCISES

PE 91A

Jan. 17 Cash.................................................................... 250 Bad Debt Expense ............................................. 750 Accounts ReceivableIan Kearns ............. 1,000

Apr. 6 Accounts ReceivableIan Kearns................... 750 Bad Debt Expense........................................ 750

6 Cash.................................................................... 750 Accounts ReceivableIan Kearns ............. 750

PE 91B

July 7 Cash.................................................................... 500 Bad Debt Expense ............................................. 2,000 Accounts ReceivableBetty Williams ....... 2,500

Nov. 13 Accounts ReceivableBetty Williams ............ 2,000 Bad Debt Expense........................................ 2,000

13 Cash.................................................................... 2,000 Accounts ReceivableBetty Williams ....... 2,000

PE 92A

Jan. 17 Cash.................................................................... 250 Allowance for Doubtful Accounts .................... 750 Accounts ReceivableIan Kearns ............. 1,000

Apr. 6 Accounts ReceivableIan Kearns................... 750 Allowance for Doubtful Accounts............... 750

6 Cash.................................................................... 750 Accounts ReceivableIan Kearns ............. 750



PE 92B

July 7 Cash.................................................................... 500 Allowance for Doubtful Accounts .................... 2,000 Accounts ReceivableBetty Williams ....... 2,500

Nov. 13 Accounts ReceivableBetty Williams ............ 2,000 Allowance for Doubtful Accounts............... 2,000

13 Cash.................................................................... 2,000 Accounts ReceivableBetty Williams ....... 2,000

PE 93A

a. $22,500 ($4,500,000 0.005)

Adjusted Balance b. Accounts Receivable........................................................ $325,000 Allowance for Doubtful Accounts ($3,900 + $22,500).... 26,400 Bad Debt Expense ............................................................ 22,500

c. Net realizable value ($325,000 $26,400) ....................... $298,600

PE 93B

a. $80,000 ($32,000,000 0.0025)

Adjusted Balance b. Accounts Receivable........................................................ $2,500,000 Allowance for Doubtful Accounts ($80,000 $9,000) 71,000 Bad Debt Expense ............................................................ 80,000

c. Net realizable value ($2,500,000 $71,000) .................... $2,429,000



PE 94A

a. $21,100 ($25,000 $3,900) Adjusted Balance b. Accounts Receivable..................................................... $325,000 Allowance for Doubtful Accounts ................................ 25,000 Bad Debt Expense ......................................................... 21,100

c. Net realizable value ($325,000 $25,000) .................... $300,000

PE 94B

a. $85,000 ($76,000 + $9,000) Adjusted Balance b. Accounts Receivable..................................................... $2,500,000 Allowance for Doubtful Accounts ................................ 76,000 Bad Debt Expense ......................................................... 85,000

c. Net realizable value ($2,500,000 $76,000) ................. $2,424,000

PE 95A

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................................................................. 90,300 Notes Receivable....................................... 90,000 Interest Revenue........................................ 300



PE 95B

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................................................................. 152,500 Notes Receivable....................................... 150,000 Interest Revenue........................................ 2,500

PE 96A

a. Accounts Receivable Turnover 2012 2011

Net sales............................... $2,430,000 $1,920,000 Accounts receivable: Beginning of year ............ $180,000 $120,000 End of year ....................... $225,000 $180,000

Average accts. receivable... $202,500 $150,000 [($180,000 + $225,000) 2] [($120,000 + $180,000) 2]

Accts. receivable turnover 12.0 12.8 ($2,430,000 $202,500) ($1,920,000 $150,000) b. Number of Days Sales

in Receivables 2012 2011 Net sales............................... $2,430,000 $1,920,000 Average daily sales ............. $6,657.5 $5,260.3 ($2,430,000 365 days) ($1,920,000 365 days)


Number of days sales in receivables................... 30.4 days 28.5 days

($202,500 $6,657.5) ($150,000 $5,260.3)



PE 96A (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 96B

a. Accounts Receivable Turnover 2012 2011

Net sales............................... $4,514,000 $4,200,000 Accounts receivable: Beginning of year ............ $280,000 $320,000 End of year ....................... $330,000 $280,000


Accts. receivable turnover 14.8 14.0 ($4,514,000 $305,000) ($4,200,000 $300,000) b. Number of Days Sales

in Receivables 2012 2011 Net sales............................... $4,514,000 $4,200,000 Average daily sales ............. $12,367.1 $11,506.8 ($4,514,000 365 days) ($4,200,000 365 days)


Number of days sales in receivables................... 24.7 days 26.1 days

($305,000 $12,367.1) ($300,000 $11,506.8) c. 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.



EXERCISES

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, 2009, filing with the Securities and Exchange Commission, Boeing reports the re-ceivables together on the balance sheet, but discloses each receivable separately in a note to the financial statements.

Ex. 92

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 them-selves and lose more than they can afford if they get caught up in the excite-ment of gambling. In contrast, Johnson & Johnsons customers are primarily other businesses such as grocery store chains.

Ex. 93

Feb. 13 Accounts ReceivableDr. Ben Katz.................. 120,000 Sales................................................................ 120,000

13 Cost of Merchandise Sold .................................. 72,000 Merchandise Inventory .................................. 72,000 May 4 Cash...................................................................... 90,000 Bad Debt Expense ............................................... 30,000 Accounts ReceivableDr. Ben Katz ............ 120,000 Nov. 19 Accounts ReceivableDr. Ben Katz.................. 30,000 Bad Debt Expense.......................................... 30,000

19 Cash...................................................................... 30,000 Accounts ReceivableDr. Ben Katz ............ 30,000



Ex. 94

Feb. 11 Accounts ReceivableDakota Co. ................. 29,000 Sales.............................................................. 29,000

11 Cost of Merchandise Sold ................................ 17,400 Merchandise Inventory ................................ 17,400

Apr. 15 Cash.................................................................... 7,500 Allowance for Doubtful Accounts .................... 21,500 Accounts ReceivableDakota Co. ............ 29,000

Sept. 3 Accounts ReceivableDakota Co. ................. 21,500 Allowance for Doubtful Accounts............... 21,500

3 Cash.................................................................... 21,500 Accounts ReceivableDakota Co. ............ 21,500

Ex. 95

a. Bad Debt Expense ......................................................... 12,950 Accounts ReceivableAaron Guzman .................. 12,950

b. Allowance for Doubtful Accounts ................................ 12,950 Accounts ReceivableAaron Guzman .................. 12,950

Ex. 96

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. 97

Account Due Date Number of Days Past Due

Alpha Auto May 15 77 (16 + 30 + 31) Best Auto July 8 23 (31 8) Downtown Repair March 18 135 (13 + 30 + 31 + 30 + 31) Luckys Auto Repair June 1 60 (29 + 31) Pit Stop Auto June 3 58 (27 + 31) Sallys April 12 110 (18 + 31 + 30 + 31) Trident Auto May 31 61 (30 + 31) Washburn Repair & Tow March 2 151 (29 + 30 + 31 + 30 + 31)



Ex. 98

a. Customer Due Date Number of Days Past Due Beltran Industries July 10 143 days (21 + 31 + 30 + 31 + 30) Doodle Company September 20 71 days (10 + 31 + 30) La Corp Inc. October 17 44 days (14 + 30) VIP Sales Company November 4 26 days We-Go Company December 21 Not past due b.

A B C D E F G 1 Aging of Receivables Schedule 2 November 30 3 Days Past Due

4 Customer Balance Not Past

Due 130 3160 6190 Over

90 5 Able Brothers Inc. 3,000 3,000 6 Accent Company 4,500 4,500

21 Zumpano Company 5,000 5,000 22 Subtotals 830,000 500,000 180,000 80,000 45,000 25,00023 Beltran Industries 12,000 12,00024 Doodle Company 8,000 8,000 25 La Corp Inc. 17,000 17,000 26 VIP Sales Company 10,000 10,000 27 We-Go Company 23,000 23,000 28 Totals 900,000 523,000 190,000 97,000 53,000 37,000

Ex. 99

Days Past Due Not Past Over Balance Due 130 3160 6190 90

Total receivables 900,000 523,000 190,000 97,000 53,000 37,000 Percentage uncollectible 1% 4% 15% 35% 60% Allowance for Doubtful Accounts 68,130 5,230 7,600 14,550 18,550 22,200



Ex. 910

Nov. 30 Bad Debt Expense ............................................. 53,850 Allowance for Doubtful Accounts............... 53,850 Uncollectible accounts estimate. ($68,130 $14,280)

Ex. 911

Estimated Uncollectible Accounts Age Interval Balance Percent Amount Not past due ............................................... $600,000 % $ 1,500 130 days past due .................................... 120,000 2 2,400 3160 days past due .................................. 60,000 3 1,800 6190 days past due .................................. 45,000 10 4,500 91180 days past due ................................ 26,000 40 10,400 Over 180 days past due ............................. 24,000 75 18,000 Total ....................................................... $875,000 $38,600

Ex. 912

2012 Dec. 31 Bad Debt Expense ............................................. 40,000 Allowance for Doubtful Accounts............... 40,000 Uncollectible accounts estimate. ($38,600 + $1,400)



Ex. 913

a. Jan. 27 Bad Debt Expense................................................ 6,000 Accounts ReceivableC. Knoll..................... 6,000 Feb. 17 Cash ...................................................................... 1,000 Bad Debt Expense................................................ 2,000 Accounts ReceivableJoni Lester ............... 3,000 Mar. 3 Accounts ReceivableC. Knoll .......................... 6,000 Bad Debt Expense .......................................... 6,000

3 Cash ...................................................................... 6,000 Accounts ReceivableC. Knoll..................... 6,000 Dec. 31 Bad Debt Expense................................................ 11,100 Accounts ReceivableJason Short ............. 4,500 Accounts ReceivableKim Snider ............... 1,500 Accounts ReceivableSue Pascall .............. 1,100 Accounts ReceivableTracy Lane ............... 3,500 Accounts ReceivableRandy Pape.............. 500 31 No entry b. Jan. 27 Allowance for Doubtful Accounts....................... 6,000 Accounts ReceivableC. Knoll..................... 6,000 Feb. 17 Cash ...................................................................... 1,000 Allowance for Doubtful Accounts....................... 2,000 Accounts ReceivableJoni Lester ............... 3,000 Mar. 3 Accounts ReceivableC. Knoll .......................... 6,000 Allowance for Doubtful Accounts ................. 6,000

3 Cash ...................................................................... 6,000 Accounts ReceivableC. Knoll..................... 6,000 June 30 Allowance for Doubtful Accounts....................... 11,100 Accounts ReceivableJason Short ............. 4,500 Accounts ReceivableKim Snider ............... 1,500 Accounts ReceivableSue Pascall .............. 1,100 Accounts ReceivableTracy Lane ............... 3,500 Accounts ReceivableRandy Pape.............. 500 Dec. 31 Bad Debt Expense................................................ 28,000 Allowance for Doubtful Accounts ................. 28,000 Uncollectible accounts estimate.

($1,600,000 1% = $28,000)



Ex. 913 (Concluded)

c. Bad debt expense under: Allowance method ......................................................................... $28,000 Direct write-off method ($6,000 + $2,000 $6,000 + $11,100)..... 13,100 Difference ($28,000 $13,100) ...................................................... $14,900

Aprilla Companys income would be $14,900 higher under the direct write-off method than under the allowance method.

Ex. 914

a. Mar. 14 Bad Debt Expense........................................ 7,500 Accounts ReceivableMyron Rimando 7,500 May 19 Cash .............................................................. 2,000 Bad Debt Expense........................................ 8,000 Accounts ReceivableShirley Mason.. 10,000 Aug. 7 Accounts ReceivableMyron Rimando .... 7,500 Bad Debt Expense .................................. 7,500

7 Cash .............................................................. 7,500 Accounts ReceivableMyron Rimando 7,500 Dec. 31 Bad Debt Expense........................................ 33,500 Accounts ReceivableBrandon Peele . 5,000 Accounts ReceivableClyde Stringer.. 9,000 Accounts ReceivableNed Berry ......... 13,000 Accounts ReceivableMary Adams..... 2,000 Accounts ReceivableGina Bowers .... 4,500 31 No entry



Ex. 914 (Continued)

b. Mar. 4 Allowance for Doubtful Accounts............... 7,500 Accounts ReceivableMyron Rimando 7,500 May 19 Cash .............................................................. 2,000 Allowance for Doubtful Accounts............... 8,000 Accounts ReceivableShirley Mason.. 10,000 Aug. 7 Accounts ReceivableMyron Rimando .... 7,500 Allowance for Doubtful Accounts ......... 7,500

7 Cash .............................................................. 7,500 Accounts ReceivableMyron Rimando 7,500 Dec. 31 Allowance for Doubtful Accounts............... 33,500 Accounts ReceivableBrandon Peele . 5,000 Accounts ReceivableClyde Stringer.. 9,000 Accounts ReceivableNed Berry ......... 13,000 Accounts ReceivableMary Adams..... 2,000 Accounts ReceivableGina Bowers .... 4,500 31 Bad Debt Expense........................................ 41,700 Allowance for Doubtful Accounts ......... 41,700 Uncollectible accounts estimate.

($45,200 $3,500)

Computations Aging Class Receivables (Number of Days Balance on Estimated Doubtful Accounts Past Due) December 31 Percent Amount 030 days $300,000 1% $ 3,000 3160 days 80,000 4 3,200 6190 days 20,000 15 3,000 91120 days 10,000 40 4,000 More than 120 days 40,000 80 32,000 Total receivables $450,000 $45,200 Estimated balance of allowance account from aging schedule ...... $45,200 Unadjusted credit balance of allowance account............................. 3,500* Adjustment........................................................................................... $41,700

*$45,000 $7,500 $8,000 + $7,500 $33,500 = $3,500



Ex. 914 (Concluded)

c. Bad debt expense under: Allowance method ......................................................................... $41,700 Direct write-off method ($7,500 + $8,000 $7,500 + $33,500)..... 41,500 Difference........................................................................................ $ 200

Silhouettes income would be $200 higher under the direct method than under the allowance method.

Ex. 915

$368,000 [$375,000 + $65,000 ($4,800,000 1%)]

Ex. 916

a. $437,500 [$450,000 + $70,000 ($5,500,000 1%)] b. $19,500 [($72,000 $65,000) + ($82,500 $70,000)]

Ex. 917

a. Bad Debt Expense ......................................................... 29,000 Accounts ReceivableWill Boyette ....................... 10,000 Accounts ReceivableStan Frey ........................... 8,000 Accounts ReceivableTammy Imes...................... 5,000 Accounts ReceivableShana Wagner................... 6,000 b. Allowance for Doubtful Accounts ................................ 29,000 Accounts ReceivableWill Boyette ....................... 10,000 Accounts ReceivableStan Frey ........................... 8,000 Accounts ReceivableTammy Imes...................... 5,000 Accounts ReceivableShana Wagner................... 6,000

Bad Debt Expense ......................................................... 45,000 Allowance for Doubtful Accounts........................... 45,000 Uncollectible accounts estimate. ($3,000,000 1% = $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).



Ex. 918

a. Bad Debt Expense ......................................................... 57,300 Accounts ReceivableTrey Betts .......................... 15,500 Accounts ReceivableCheryl Carson ................... 9,000 Accounts ReceivableIrene Harris........................ 29,700 Accounts ReceivableRenee Putman................... 3,100 b. Allowance for Doubtful Accounts ................................ 57,300 Accounts ReceivableTrey Betts .......................... 15,500 Accounts ReceivableCheryl Carson ................... 9,000 Accounts ReceivableIrene Harris........................ 29,700 Accounts ReceivableRenee Putman................... 3,100 Bad Debt Expense ......................................................... 69,800 Allowance for Doubtful Accounts........................... 69,800 Uncollectible accounts estimate. ($67,500 + $2,300)

Computations

Aging Class Receivables (Number of Days Balance on Estimated Doubtful Accounts Past Due) December 31 Percent Amount 030 days $600,000 1% $ 6,000 3160 days 150,000 2 3,000 6190 days 75,000 18 13,500 91120 days 50,000 30 15,000 More than 120 days 60,000 50 30,000 Total receivables $935,000 $67,500 Unadjusted debit balance of Allowance for Doubtful Accounts ($57,300 $55,000) ................................... $ 2,300 Estimated balance of Allowance for Doubtful Accounts from aging schedule ................................ 67,500 Adjustment..................................................................... $69,800 c. Net income would have been $12,500 lower in 2012 under the allowance me-

thod, 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).



Ex. 919

Due Date Interest a. Aug. 13 $600 [$40,000 0.06 (90/360)] b. May 19 100 [$15,000 0.04 (60/360)] c. July 18 120 [$24,000 0.03 (60/360)] d. Nov. 30 140 [$10,500 0.08 (60/360)] e. Dec. 28 300 [$18,000 0.05 (120/360)]

Ex. 920

a. July 8 (21 + 31 + 30 + 8) b. $91,350 [($90,000 6% 90/360) + $90,000] c. (1) Notes Receivable .................................................... 90,000 Accounts Rec.Oregon Interior Decorators 90,000

(2) Cash ......................................................................... 91,350 Notes Receivable............................................... 90,000 Interest Revenue................................................ 1,350

Ex. 921

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 customers account

receivable. 7. Payment received from customer for dishonored note plus interest earned af-

ter due date.



Ex. 922

2011 Dec. 10 Notes Receivable............................................... 36,000 Accounts ReceivablePoint Loma Clothing & Bags Co. ............................... 36,000

31 Interest Receivable............................................ 84 Interest Revenue .......................................... 84 Accrued interest. ($36,000 0.04 21/360 = $84)

31 Interest Revenue................................................ 84 Income Summary ......................................... 84

2012 Mar. 9 Cash.................................................................... 36,360 Notes Receivable ......................................... 36,000 Interest Receivable ...................................... 84 Interest Revenue .......................................... 276*

*$36,000 0.04 69/360

Ex. 923

May 3 Notes Receivable............................................. 150,000 Accounts ReceivableSunrider Co. ....... 150,000 Aug. 31 Accounts ReceivableSunrider Co. ............ 153,000 Notes Receivable ....................................... 150,000 Interest Revenue ........................................ 3,000*

*$150,000 0.06 120/360 Oct. 30 Cash.................................................................. 155,295 Accounts ReceivableSunrider Co. ....... 153,000 Interest Revenue ........................................ 2,295*

*$153,000 0.09 60/360



Ex. 924

Mar. 1 Notes Receivable............................................... 80,000 Accounts ReceivableTomekia Co. ......... 80,000

18 Notes Receivable............................................... 75,000 Accounts ReceivableMystic Co. ............. 75,000

Apr. 30 Accounts ReceivableTomekia Co. ............... 80,800 Notes Receivable ......................................... 80,000 Interest Revenue .......................................... 800* *($80,000 6% 60/360)

May 17 Accounts ReceivableMystic Co. .................. 76,000 Notes Receivable ......................................... 75,000 Interest Revenue .......................................... 1,000* *($75,000 8% 60/360)

July 29 Cash.................................................................... 82,416 Accounts ReceivableTomeka Co. .......... 80,800 Interest Revenue .......................................... 1,616* *($80,800 0.08 90/360)

Aug. 23 Allowance for Doubtful Accounts .................... 76,000 Accounts ReceivableMystic Co. ............. 76,000

Ex. 925

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 re-ceivable.

A corrected partial balance sheet would be as follows:

TULIPS COMPANY Balance Sheet

December 31, 2012

Assets Current assets: Cash............................................................................ $138,000 Notes receivable ........................................................ 400,000 Accounts receivable.................................................. $795,000 Less allowance for doubtful accounts ............... 14,500 780,500 Interest receivable ..................................................... 20,000



Ex. 926

a. and b. 2009 2008

Net sales................................ $5,018,900 $4,880,100 Accounts receivable............. $576,700 $585,000 Average accts. receivable.... $580,850 $548,450 [($576,700 + $585,000)/2] [($585,000 + $511,900)/2] Accts. receivable turnover... 8.6 8.9 ($5,018,900/$580,850) ($4,880,100/$548,450)

Average daily sales .............. $13,750.4 $13,370.1 ($5,018,900/365) ($4,880,100/365) Days sales in receivables ... 42.2 41.0 ($580,850/$13,750.4) ($548,450/$13,370.1) c. The accounts receivable turnover indicates a decrease in the efficiency of col-

lecting accounts receivable by decreasing from 8.9 to 8.6, an unfavorable trend. The days sales in receivables also indicates a decrease in the effi-ciency 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 indus-try averages and similar firms.

Ex. 927

a. and b. 2009 2008

Net sales............................... $10,148,082 $10,070,778 Accounts receivable............ $1,171,797 $1,161,481 Average accts. receivable... $1,166,639 $1,079,166.5 [($1,171,797 + $1,161,481)/2] [($1,161,481 + $996,852)/2] Accts. receivable turnover 8.7 9.3 ($10,148,082/$1,166,639) ($10,070,778/$1,079,166.5) Average daily sales ............. $27,803.0 $27,591.2 ($10,148,082/365) ($10,070,778/365) Days sales in receivables .. 42.0 39.1 ($1,166,639/$27,803.0) ($1,079,166.5/$27,591.2)



Ex. 927 (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. 928

a. and b. For the Period Ending Jan. 31, Jan. 31, 2010 2009 Net sales................................. $8,632 $9,043 Accounts receivable.............. $249 $313 Average accts. receivable..... $281 [($249 + $313)/2] $334 [($313 + $355)/2] Accts. receivable turnover.... 30.7 ($8,632/$281) 27.1 ($9,043/$334) Average daily sales ............... $23.6 ($8,632/365) $24.8 ($9,043/365) Days sales in receivables .... 11.9 ($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 indicat-ing a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.



Ex. 929

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. 927 and Ex. 928. 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 Heinzs business cus-tomers 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 Brands as shown in (a).



PROBLEMS

Prob. 91A

2. 20 Feb. 17 Cash ...................................................................... 7,500 Allowance for Doubtful Accounts....................... 22,500 Accounts ReceivableGillespie Co. ........... 30,000 Apr. 11 Accounts ReceivableColleen Bertram............ 4,250 Allowance for Doubtful Accounts ................. 4,250

11 Cash ...................................................................... 4,250 Accounts ReceivableColleen Bertram....... 4,250 July 6 Allowance for Doubtful Accounts....................... 9,000 Accounts ReceivableCovered Wagon Co. 9,000 Nov. 20 Accounts ReceivableDugan Co. ..................... 5,900 Allowance for Doubtful Accounts ................. 5,900

20 Cash ...................................................................... 5,900 Accounts ReceivableDugan Co. ............... 5,900 Dec. 31 Allowance for Doubtful Accounts....................... 21,700 Accounts ReceivableKipp Co. .................. 3,000 Accounts ReceivableMoore Co. ................ 4,000 Accounts ReceivableButte Distributors.... 8,000 Accounts ReceivableParker Towers ......... 6,700

31 Bad Debt Expense................................................ 63,050 Allowance for Doubtful Accounts ................. 63,050 Uncollectible accounts estimate. ($60,000 + $3,050)



Prob. 91A (Concluded)

1. and 2.

Allowance for Doubtful Accounts Feb. 17 22,500 Jan. 1 Balance 40,000July 6 9,000 Apr. 11 4,250Dec. 31 21,700 Nov. 20 5,900Dec. 31 Unadjusted Balance 3,050 Dec. 31 Adjusting Entry 63,050 Dec. 31 Adj. Balance 60,000

Bad Debt Expense Dec. 31 Adjusting Entry 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)



Prob. 92A

1. Customer Due Date Number of Days Past Due

Antelope Sports & Flies June 21, 2011 193 days (9 + 31 + 31 + 30 + 31 + 30 + 31) Big Hole Flies Aug. 30, 2011 123 days (1 + 30 + 31 + 30 + 31) Charlies Fish Co. Sept. 8, 2011 114 days (22 + 31 + 30 + 31) Deschutes Sports Oct. 20, 2011 72 days (11 + 30 + 31) Green River Sports Nov. 7, 2011 54 days (23 + 31) Smith River Co. Nov. 28, 2011 33 days (2 + 31) Wild Trout Company Dec. 5, 2011 26 days Wolfe Sports Jan. 7, 2012 Not past due 2. and 3.

A B C D E F G H 1 Aging of Receivables Schedule 2 December 31, 2011 3 Days Past Due

4 Customer Balance Not Past

Due 130 3160 6190 91120 Over 120

5 AAA Fishery 20,000 20,000 6 Blue Ribbon Flies 7,500 7,500

30 Z Fish Co. 4,000 4,000 31 Subtotals 1,060,00 500,000 315,000 120,000 40,000 25,000 60,00032 Ant. Sports & Flies 3,000 3,00033 Big Hole Flies 6,500 6,50034 Charlies Fish Co. 12,000 12,000 35 Deschutes Sports 4,000 4,000 36 Green River Sports 3,500 3,500 37 Smith River Co. 1,500 1,500 38 Wild Trout Company 5,000 5,000 39 Wolfe Sports 4,500 4,500 40 Totals 1,100,00 504,500 320,000 125,000 44,000 37,000 69,50041 Percent uncollectible 1% 4% 8% 25% 45% 80%

42 Estimate of uncollectible accounts 111,095 5,045 12,800 10,000 11,000 16,650 55,6

00




4. Bad Debt Expense ......................................................... 112,500 Allowance for Doubtful Accounts........................... 112,500 Uncollectible accounts estimate. ($111,095 + $1,405)

5. On the balance sheet, assets would be overstated by $112,500 since the al-lowance of doubtful accounts would be understated by $112,500. In addi

6. tion, the owners 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.



Prob. 93A

1. Bad Debt Expense Increase Balance of Expense Expense (Decrease) Allowance Actually Based on in Amount Account, Year Reported Estimate of Expense End of Year

1st $2,000 $ 5,250 $3,250 $ 3,250 2nd 3,400 6,750 3,350 6,600 3rd 6,450 9,000 2,550 9,150 4th 9,200 15,000 5,800 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 sec-ond year, the comparable amounts were $6,560 ($1,600 + $3,700 + $1,260) and $6,750.



Prob. 94A

1. (a) (b) Note Due Date Interest Due at Maturity

1. June 9 $300 ($45,000 60/360 4%) 2. July 24 90 ($18,000 30/360 6%) 3. Oct. 29 720 ($36,000 120/360 6%) 4. Dec. 30 540 ($36,000 60/360 9%) 5. Jan. 14 540 ($54,000 60/360 6%) 6. Jan. 26 135 ($40,500 30/360 4%) 2. Oct. 29 Accounts Receivable ................................... 36,720 Notes Receivable .................................... 36,000 Interest Revenue..................................... 720 3. Dec. 31 Interest Receivable ...................................... 432 Interest Revenue..................................... 432 Accrued interest.

$54,000 0.06 46/360 = $ 414 $40,500 0.04 4/360 = 18 Total $432 4. Jan. 14 Cash .............................................................. 54,540 Notes Receivable .................................... 54,000 Interest Receivable ................................. 414 Interest Revenue..................................... 126*

*$54,000 0.06 14/360 26 Cash .............................................................. 40,635 Notes Receivable .................................... 40,500 Interest Receivable ................................. 18 Interest Revenue..................................... 117*

*$40,500 0.04 26/360



Prob. 95A

June 3 Notes Receivable............................................... 24,000 Accounts Receivable ................................... 24,000 July 26 Notes Receivable............................................... 27,000 Accounts Receivable ................................... 27,000 Aug. 2 Cash.................................................................... 24,160 Notes Receivable ......................................... 24,000 Interest Revenue .......................................... 160 Sept. 4 Notes Receivable............................................... 60,000 Accounts Receivable ................................... 60,000 Nov. 3 Cash.................................................................... 60,300 Notes Receivable ......................................... 60,000 Interest Revenue .......................................... 300 5 Notes Receivable............................................... 36,000 Accounts Receivable ................................... 36,000 23 Cash.................................................................... 27,450 Notes Receivable ......................................... 27,000 Interest Revenue .......................................... 450 30 Notes Receivable............................................... 18,000 Accounts Receivable ................................... 18,000 Dec. 5 Cash.................................................................... 36,210 Notes Receivable ......................................... 36,000 Interest Revenue .......................................... 210 30 Cash.................................................................... 18,075 Notes Receivable ......................................... 18,000 Interest Revenue .......................................... 75



Prob. 96A

Jan. 5 Notes Receivable............................................... 17,500 Cash .............................................................. 17,500 Feb. 4 Accounts ReceivableTedra & Co. ................ 19,000 Sales.............................................................. 19,000

4 Cost of Merchandise Sold ................................ 11,000 Merchandise Inventory ................................ 11,000 13 Accounts ReceivableCentennial Co. ........... 30,000 Sales.............................................................. 30,000

13 Cost of Merchandise Sold ................................ 17,600 Merchandise Inventory ................................ 17,600 Mar. 6 Notes Receivable............................................... 19,000 Accounts ReceivableTedra & Co. .......... 19,000 14 Notes Receivable............................................... 30,000 Accounts ReceivableCentennial Co. ..... 30,000 Apr. 5 Notes Receivable............................................... 17,500 Cash.................................................................... 350 Notes Receivable ......................................... 17,500 Interest Revenue .......................................... 350* *($17,500 8% 90/360) May 5 Cash.................................................................... 19,190 Notes Receivable ......................................... 19,000 Interest Revenue .......................................... 190* *($19,000 6% 60/360) 13 Accounts ReceivableCentennial Co. ........... 30,450 Notes Receivable ......................................... 30,000 Interest Revenue .......................................... 450* *($30,000 9% 60/360) July 12 Cash.................................................................... 31,059 Accounts ReceivableCentennial Co. ..... 30,450 Interest Revenue .......................................... 609* *($30,450 12% 60/360) Aug. 3 Cash.................................................................... 18,025 Notes Receivable ......................................... 17,500 Interest Revenue .......................................... 525* *($17,500 9% 120/360)




Sept. 7 Accounts ReceivableLock-It Co. ....................... 9,000 Sales.................................................................... 9,000

7 Cost of Merchandise Sold ...................................... 5,000 Merchandise Inventory ...................................... 5,000

17 Cash.......................................................................... 8,910 Sales Discounts....................................................... 90 Accounts ReceivableLock-It Co. .................. 9,000



Prob. 91B

2. 20 Mar. 15 Accounts ReceivableBrad Atwell.................... 3,750 Allowance for Doubtful Accounts ................. 3,750

15 Cash ...................................................................... 3,750 Accounts ReceivableBrad Atwell .............. 3,750 May 20 Allowance for Doubtful Accounts....................... 15,000 Accounts ReceivableGlory Rigging Co. ... 15,000 Aug. 13 Cash ...................................................................... 7,200 Allowance for Doubtful Accounts....................... 10,800 Accounts ReceivableCoastal Co. ............. 18,000 Sept. 2 Accounts ReceivableLorie Kidd...................... 6,500 Allowance for Doubtful Accounts ................. 6,500

2 Cash ...................................................................... 6,500 Accounts ReceivableLorie Kidd ................ 6,500 Dec. 31 Allowance for Doubtful Accounts....................... 21,000 Accounts ReceivableKimbro Co. .............. 9,000 Accounts ReceivableMcHale Co. .............. 2,500 Accounts ReceivableSummit Furniture .... 7,500 Accounts ReceivableWes Riggs................ 2,000

31 Bad Debt Expense................................................ 48,050 Allowance for Doubtful Accounts ................. 48,050 Uncollectible accounts estimate. ($50,000 $1,950)



Prob. 91B (Concluded)

1. and 2.

Allowance for Doubtful Accounts May 20 15,000 Jan. 1 Balance 38,500Aug. 13 10,800 Mar. 15 3,750Dec. 31 21,000 Sept. 2 6,500 Dec. 31 Unadjusted Balance 1,950 Dec. 31 Adjusting Entry 48,050 Dec. 31 Adjusted Balance 50,000

Bad Debt Expense Dec. 31 Adjusting Entry 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)



Prob. 92B

1. Customer Due Date Number of Days Past Due

Shining Beauty May 28, 2009 217 days (3 + 30 + 31 + 31 + 30 + 31 + 30 + 31) Paradise Beauty Store Sept. 7, 2011 115 days (23 + 31 + 30 + 31) Amazing Hair Products Oct. 17, 2011 75 days (14 + 30 + 31) Hairys Hair Care Oct. 24, 2011 68 days (7 + 30 + 31) Golden Images Nov. 23, 2011 38 days (7 + 31) Oh The Hair Nov. 29, 2011 32 days (1 + 31) All About Hair Dec. 2, 2011 29 days Lasting Images Jan. 5, 2012 Not past due 2. and 3.

A B C D E F G H 1 Aging of Receivables Schedule 2 December 31, 2011 3 Days Past Due

4 Customer BalanceNot Past

Due 130 3160 6190 91120 Over 120

5 Absolute Beauty 15,000 15,000 6 Blonde Wigs 8,000 8,000

30 Zensational Beauty 3,000 3,000 31 Subtotals 700,000 287,000 180,000 150,000 40,000 18,000 25,00032 Shining Beauty 4,000 4,00033 Paradise Beauty Store 7,000 7,000 34 Amazing Hair Products 1,000 1,000 35 Hairys Hair Care 1,500 1,500 36 Golden Images 1,600 1,600 37 Oh The Hair 3,500 3,500 38 All About Hair 4,000 4,000 39 Lasting Images 9,400 9,400 40 Totals 732,000 296,400 184,000 155,100 42,500 25,000 29,00041 Percent uncollectible 2% 5% 12% 16% 40% 75%

42 Estimate of uncollectible accounts 72,290 5,928 9,200 18,612 6,800 10,000 21,750




4. Bad Debt Expense ......................................................... 69,250 Allowance for Doubtful Accounts........................... 69,250 Uncollectible accounts estimate. ($72,290 $3,040)

5. On the balance sheet, assets would be overstated by $69,250 since the allow-ance of doubtful accounts would be understated by $69,250. In addition, the owners 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.



Prob. 93B

1. Bad Debt Expense Increase Balance of Expense Expense (Decrease) Allowance Actually Based on in Amount Account, Year Reported Estimate of Expense End of Year

1st $ 1,300 $ 7,000 $5,700 $ 5,700 2nd 3,600 10,000 6,400 12,100 3rd 13,500 15,000 1,500 13,600 4th 17,700 18,000 300 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 sec-ond year, the comparable amounts were $9,400 ($2,100 + $3,300 + $4,000) and $10,000.



Prob. 94B

1. (a) (b) Note Due Date Interest Due at Maturity

1. June 2 $100 ($15,000 60/360 4%) 2. July 3 432 ($57,600 45/360 6%) 3. Nov. 5 625 ($50,000 90/360 5%) 4. Dec. 3 300 ($20,000 90/360 6%) 5. Jan. 20 360 ($27,000 60/360 8%) 6. Feb. 14 216 ($21,600 60/360 6%) 2. Nov. 5 Accounts Receivable ................................... 50,625 Notes Receivable .................................... 50,000 Interest Revenue..................................... 625 3. Dec. 31 Interest Receivable ...................................... 294 Interest Revenue..................................... 294 Accrued interest.

$27,000 0.08 40/360 = $240 $21,600 0.06 15/360 = 54 Total $294 4. Jan. 20 Cash .............................................................. 27,360 Notes Receivable .................................... 27,000 Interest Receivable ................................. 240 Interest Revenue..................................... 120*

*$27,000 0.08 20/360 Feb. 14 Cash .............................................................. 21,816 Notes Receivable .................................... 21,600 Interest Receivable ................................. 54 Interest Revenue..................................... 162*

*$21,600 0.06 45/360



Prob. 95B

Mar. 1 Notes Receivable............................................... 90,000 Accounts Receivable ................................... 90,000 25 Notes Receivable............................................... 10,000 Accounts Receivable ................................... 10,000 Apr. 30 Cash.................................................................... 90,900 Notes Receivable ......................................... 90,000 Interest Revenue .......................................... 900 May 16 Notes Receivable............................................... 36,000 Accounts Receivable ................................... 36,000 31 Notes Receivable............................................... 25,000 Accounts Receivable ................................... 25,000 June 23 Cash.................................................................... 10,100 Notes Receivable ......................................... 10,000 Interest Revenue .......................................... 100 30 Cash.................................................................... 25,125 Notes Receivable ......................................... 25,000 Interest Revenue .......................................... 125 July 1 Notes Receivable............................................... 28,000 Accounts Receivable ................................... 28,000 31 Cash.................................................................... 28,210 Notes Receivable ......................................... 28,000 Interest Revenue .......................................... 210 Aug. 14 Cash.................................................................... 36,630 Notes Receivable ......................................... 36,000 Interest Revenue .......................................... 630



Prob. 96B

20 Jan. 13 Accounts ReceivableBoylan Co. ................. 32,000 Sales.............................................................. 32,000

13 Cost of Merchandise Sold ................................ 19,200 Merchandise Inventory ................................ 19,200 Mar. 10 Notes Receivable............................................... 32,000 Accounts ReceivableBoylan Co. ............ 32,000 May 9 Cash.................................................................... 32,320 Notes Receivable ......................................... 32,000 Interest Revenue .......................................... 320 June 10 Accounts ReceivableHolen........................... 18,000 Sales.............................................................. 18,000

10 Cost of Merchandise Sold ................................ 10,000 Merchandise Inventory ................................ 10,000 15 Notes Receivable............................................... 24,000 Cash .............................................................. 24,000 20 Cash.................................................................... 17,640 Sales Discounts................................................. 360 Accounts ReceivableHolen...................... 18,000 July 15 Notes Receivable............................................... 24,000 Cash.................................................................... 140 Notes Receivable ......................................... 24,000 Interest Revenue .......................................... 140*

*($24,000 7% 30/360) Sept. 13 Cash.................................................................... 24,360 Notes Receivable ......................................... 24,000 Interest Revenue .......................................... 360*

*($24,000 9% 60/360) 13 Accounts ReceivableAztec Co. .................... 40,000 Sales.............................................................. 40,000 13 Cost of Merchandise Sold ................................ 25,000 Merchandise Inventory ................................ 25,000




Oct. 12 Notes Receivable............................................... 40,000 Accounts ReceivableAztec Co. .............. 40,000 Dec. 11 Accounts ReceivableAztec Co. .................... 40,400 Notes Receivable ......................................... 40,000 Interest Revenue .......................................... 400*

*($40,000 6% 60/360) 26 Cash.................................................................... 40,602 Accounts ReceivableAztec Co. .............. 40,400 Interest Revenue .......................................... 202*

*($40,400 12% 15/360)



CASES & PROJECTS

CP 91

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 com-pute interest on a 365-day year. Hence, Stacey is behaving in an unprofessional manner.

CP 92

1. a. b. Addition to Allowance Accounts Written Year for Doubtful Accounts Off During Year

2009 $7,500 $4,300 ($7,500 $3,200) 2010 7,875 5,575 ($3,200 + $7,875 $5,500) 2011 8,500 6,000 ($5,500 + $8,500 $8,000) 2012 9,500 7,200 ($8,000 + $9,500 $10,300)

2. a. 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 bal-ance 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 ex-panding volume of sales.



CP 92 (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 signifi-cant changes between prior years and the current year may have oc-curred, which might reduce the accuracy of the historical data. For exam-ple, 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 93

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 col-

lecting 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 unfa-vorable trend. Thus, based on (1) and (2), Best Buy has decreased its efficiency in the collection of receivables.



CP 93 (Concluded)

4. We assumed that the percentage of credit sales to total sales remains con-stant 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 ra-tios 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 pur-chasing The Carphone Warehouse Group (CWG), which was one of Europes 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 re-ceivables for fiscal year 2009 would be as follows:

Net sales......................................... $45,015 Accounts receivable...................... $682 ($1,868 $1,186) Average accounts receivable ....... $615.5 [($682 + $549)/2] Accounts receivable turnover ...... 73.1 ($45,015/$615.5) Average daily sales ....................... $123.3 ($45,015/365) Days sales in receivables ............ 5.0 ($615.5/$123.3)

Adjusting for the acquisition of CWG makes Best Buys 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 Buys efficiency in collecting its pre-acquisition receivables remained approximately the same during 2009 and 2008.

CP 94

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)]



CP 94 (Concluded)

3. The accounts receivable turnover indicates a decrease in the efficiency of col-lecting 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 un-favorable trend. Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.

CP 95

1. and 2. 2009 2008 Net sales ........................... $723,229 $955,577 Accounts receivable ........ 66,623 50,823 Average accounts receivable..................... $58,723.0 [($66,623 + $50,823)/2] $46,153.0 [($50,823 + $41,483)/2] Accounts receivable turnover........................ 12.3 ($723,229/$58,723.0) 20.7 ($955,577/$46,153.0) Average daily sales.......... $1,981.4 ($723,229/365) $2,618.0 ($955,577/365) Days sales in receivables................... 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 col-lecting 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. EarthLinks 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 EarthLinks 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. 927).



CP 96

1. Note to Instructors: The turnover ratios will vary over time. Recently, the vari-ous turnover ratios (rounded to one decimal place) were as follows:

Alcoa Inc. 7.7 AutoZone, Inc. 68.9 Barnes & Noble, Inc. 54.4 Caterpillar 1.9 The Coca-Cola Company 9.1 Delta Air Lines 17.0 The Home Depot 68.4 IBM 3.3 Kroger 82.8 Procter & Gamble 10.0 Wal-Mart 101.4 Whirlpool Corporation 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.

chapter 09 - financial accounting

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