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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. Dan’s Hardware should use the direct write-off 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 $661,500 ($673,400 – $11,900) 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 $673,400 less the amount of the allowance for doubtful accounts of $11,900, thus yielding net accounts receivable of $661,500.

5. (1) The percentage rate used is excessive in relationship to the accounts written off as

uncollectible; hence, the balance in the allowance is excessive.

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

6. An estimate based on analysis of receivables provides the most accurate estimate of the

current net realizable value. 7. a. Sailfish Company

b. Notes Receivable 8. The interest will amount to $5,100 ($85,000 × 6%) 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 for $243,600

Credit Notes Receivable for $240,000 Credit Interest Revenue for $3,600

10.

Cash 245,427 Accounts Receivable [$240,000 + ($240,000 × 6% × 90 ÷ 360)] 243,600 Interest Revenue 1,827

($243,600 × 30 ÷ 360 × 9% = $1,827).

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PRACTICE EXERCISES

PE 9–1A June 2 Cash 1,200

Bad Debt Expense 4,000 Accounts Receivable—Melissa Crone 5,200 Oct. 9 Accounts Receivable—Melissa Crone 4,000

Bad Debt Expense 4,000 9 Cash 4,000 Accounts Receivable—Melissa Crone 4,000 PE 9–1B Oct. 2 Cash 600

Bad Debt Expense 1,350 Accounts Receivable—Rachel Elpel 1,950 Dec. 20 Accounts Receivable—Rachel Elpel 1,350

Bad Debt Expense 1,350 20 Cash 1,350 Accounts Receivable—Rachel Elpel 1,350 PE 9–2A June 2 Cash 1,200

Allowance for Doubtful Accounts 4,000 Accounts Receivable—Melissa Crone 5,200 Oct. 9 Accounts Receivable—Melissa Crone 4,000

Allowance for Doubtful Accounts 4,000 9 Cash 4,000 Accounts Receivable—Melissa Crone 4,000


PE 9–2B Oct. 2 Cash 600

Allowance for Doubtful Accounts 1,350 Accounts Receivable—Rachel Elpel 1,950 Dec. 20 Accounts Receivable—Rachel Elpel 1,350

Allowance for Doubtful Accounts 1,350 20 Cash 1,350 Accounts Receivable—Rachel Elpel 1,350

PE 9–3A a. $214,125 ($28,550,000 × 0.0075) b.

Accounts Receivable……………………………………………… Allowance for Doubtful Accounts ($19,670 + $214,125)……… Bad Debt Expense……………………………………………………

c. Net realizable value ($1,975,000 – $233,795)…………………… PE 9–3B a. $231,500 ($46,300,000 × 0.0050) b.

Accounts Receivable……………………………………………… Allowance for Doubtful Accounts ($231,500 – $12,500)……… Bad Debt Expense……………………………………………………

c. Net realizable value ($3,460,000 – $219,000)……………………

Adjusted Balance

$1,975,000 233,795 214,125

$1,741,205

Adjusted Balance

$3,460,000 219,000 231,500

$3,241,000


PE 9–4A a. $205,330 ($225,000 – $19,670) b.

Accounts Receivable……………………………………………… Allowance for Doubtful Accounts………………………………… Bad Debt Expense……………………………………………………

c. Net realizable value ($1,975,000 – $225,000)…………………… PE 9–4B a. $257,500 ($245,000 + $12,500) b.

Accounts Receivable……………………………………………… Allowance for Doubtful Accounts………………………………… Bad Debt Expense……………………………………………………

c. Net realizable value ($3,460,000 – $245,000)…………………… PE 9–5A

Adjusted Balance

$1,975,000 225,000 205,330

$1,750,000

Adjusted Balance

$3,460,000 245,000 257,500

$3,215,000

a. The due date for the note is September 10, determined as follows:

July …………………………………………………………….……… 19 days (31 – 12) August …………………………………………………………….… 31 days September …………………………………………………………… 10 Total…………………………………………………………………… 60 days

b. $54,450 [$54,000 + ($54,000 × 5% × 60 ÷ 360)] c. Sept. 10 Cash 54,450

Notes Receivable 54,000 Interest Revenue 450


PE 9–5B a. The due date for the note is August 7, determined as follows:

April…………………………………………………………………… 21 days (30 – 9) May…………………………………………………………………… 31 days June…………………………………………………………………… 30 days July…………………………………………………………………… 31 days August………………………………………………………….…… 7 days Total…………………………………………………………………… 120 days

b. $462,000 [$450,000 + ($450,000 × 8% × 120 ÷ 360)] c. PE 9–6A a.

Turnover 2016 2015 Sales……………………………… $2,912,000 $2,958,000 Accounts receivable:

Beginning of year…………… $ 300,000 $ 280,000 End of year…………………… $ 340,000 $ 300,000

Average accts. receivable…… Accts. receivable turnover……

$ 320,000

[($300,000 + $340,000) ÷ 2] 9.1

$ 290,000

[($280,000 + $300,000) ÷ 2] 10.2

($2,912,000 ÷ $320,000) ($2,958,000 ÷ $290,000) b.

Number of Days’ Sales

in Receivables 2016 2015 Sales……………………………… $2,912,000 $2,958,000 Average daily sales…………… $ 7,978.1 $ 8,104.1

($2,912,000 ÷ 365 days) ($2,958,000 ÷ 365 days) Average accts. receivable…… $ 320,000 $ 290,000

[($300,000 + $340,000) ÷ 2] [($280,000 + $300,000) ÷ 2] Number of days’ sales in

receivables………………………

40.1 days 35.8 days ($320,000 ÷ $7,978.1) ($290,000 ÷ $8,104.1)

c. The decrease in the accounts receivable turnover from 10.2 to 9.1 and the

increase in the number of days’ sales in receivables from 35.8 days to 40.1 days indicate unfavorable trends in the efficiency of collecting receivables.

Aug. 7 Cash 462,000 Notes Receivable 450,000 Interest Revenue 12,000


PE 9–6B a. b.

Accounts Receivable Turnover 2016 2015 Sales…………………………………… $7,906,000 $6,726,000 Accounts receivable:

Beginning of year……………… $ 600,000 $ 540,000 End of year……………………… $ 580,000 $ 600,000

Average accts. receivable………… $ 590,000 $ 570,000 [($600,000 + $580,000) ÷ 2] [($540,000 + $600,000) ÷ 2]

Accts. receivable turnover………… 13.4 11.8 ($7,906,000 ÷ $590,000) ($6,726,000 ÷ $570,000)

Number of Days’ Sales

in Receivables 2016 2015 Sales…………………………………… $7,906,000 $6,726,000 Average daily sales………………… $ 21,660.3 $ 18,427.4 Average accts. receivable…………

($7,906,000 ÷ 365 days) ($6,726,000 ÷ 365 days)

$ 590,000 $ 570,000 [($600,000 + $580,000) ÷ 2] [($540,000 + $600,000) ÷ 2]

Number of days’ sales in receivables…………………………

27.2 days 30.9 days

($590,000 ÷ $21,660.3) ($570,000 ÷ $18,427.4) c. The increase in the accounts receivable turnover from 11.8 to 13.4 and the

decrease in the number of days’ sales in receivables from 30.9 days to 27.2 days indicate favorable trends in the efficiency of collecting receivables.


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 its 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. MGM Resorts International: 17.1% ($101,207,000 ÷ $592,937,000) b. Johnson & Johnson: 4.0% ($466,000,000 ÷ $11,775,000,000) c. Casino operations experience greater bad debt risk because 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. 3 Accounts Receivable—Dr. Jill Hall 17,340

Sales 17,340 3 Cost of Merchandise Sold 9,500 Merchandise Inventory 9,500 Sept. 10 Cash 5,000

Bad Debt Expense 12,340 Accounts Receivable—Dr. Jill Hall 17,340 Dec. 21 Accounts Receivable—Dr. Jill Hall 12,340

Bad Debt Expense 12,340 21 Cash 12,340 Accounts Receivable—Dr. Jill Hall 12,340


Ex. 9–4 Apr. 2 Accounts Receivable—Peking Palace Co. 41,900

Sales 41,900 2 Cost of Merchandise Sold 24,850 Merchandise Inventory 24,850 June 9 Cash 10,000

Allowance for Doubtful Accounts 31,900 Accounts Receivable—Peking Palace Co. 41,900 Oct. 31 Accounts Receivable—Peking Palace Co. 31,900

Allowance for Doubtful Accounts 31,900 31 Cash 31,900 Accounts Receivable—Peking Palace Co. 31,900 Ex. 9–5 a. b. Ex. 9–6 a. $115,125 ($15,350,000 × 0.0075) c. $76,750 ($15,350,000 × 0.0050) b. $148,000 ($125,000 + $23,000) d. $165,500 ($180,000 – $14,500) Ex. 9–7

Account Due Date Number of Days Past Due Avalanche Auto August 8 84 (23 + 30 + 31) Bales Auto October 11 20 (31 – 11) Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31) Lucky’s Auto Repair September 2 59 (28 + 31) Pit Stop Auto September 19 42 (11 + 31) Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31) Trident Auto August 24 68 (7 + 30 + 31) Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31)

Bad Debt Expense 11,750 Accounts Receivable—Wil Treadwell 11,750

Allowance for Doubtful Accounts 11,750 Accounts Receivable—Wil Treadwell 11,750


Ex. 9–8 a.

Customer Due Date Number of Days Past Due Builders Industries May 1 122 days (30 + 30 + 31 + 31) Elkhorn Company June 20 72 days (10 + 31 + 31) Granite Creek Inc. July 13 49 days (18 + 31) Lockwood Company September 9 Not past due Teton Company August 7 24 days (31 – 7)

b. Aging of Receivables Schedule

August 31 Customer

Balance

Not Past

Due

Days Past Due 1–30

31–60

61–90

Over 90

Acme Industries Inc. 3,000 3,000 Alliance Company 4,500 4,500 Zollinger Company 5,000 5,000 Subtotals 1,050,000 600,000 220,000 115,000 85,000 30,000 Builders Industries 44,500 44,500 Elkhorn Company 21,000 21,000 Granite Creek Inc. 7,500 7,500 Lockwood Company 14,000 14,000 Teton Company 13,000 13,000 Totals 1,150,000 614,000 233,000 122,500 106,000 74,500

Ex. 9–9

Balance

Not Past

Due


31–60

61–90

Over 90

Total receivables 1,150,000 614,000 233,000 122,500 106,000 74,500 Percentage uncollectible 3% 4% 15% 35% 80% Allowance for doubtful

accounts 142,815 18,420 9,320 18,375 37,100 59,600


Ex. 9–10 Aug. 31 Bad Debt Expense 136,465

Allowance for Doubtful Accounts 136,465 Uncollectible accounts estimate ($142,815 – $6,350). Ex. 9–11

Age Interval

Balance

Estimated Uncollectible Accounts Percent Amount

Not past due $1,250,000 0.75% $ 9,375 1–30 days past due 500,000 3.00% 15,000 31–60 days past due 190,000 5.00% 9,500 61–90 days past due 60,000 15.00% 9,000 91–180 days past due 36,000 40.00% 14,400 Over 180 days past due 24,000 80.00% 19,200

Total $2,060,000 $76,475 Ex. 9–12 2016 Dec. 31 Bad Debt Expense 83,675

Allowance for Doubtful Accounts 83,675 Uncollectible accounts estimate ($76,475 + $7,200).


Ex. 9–13 a.

Apr. 13 Bad Debt Expense 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500

Bad Debt Expense 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450

Bad Debt Expense 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Bad Debt Expense 13,510

Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 No entry


Ex. 9–13 (Concluded) b. c. Bad debt expense under:

Allowance method………………………...……………………………………… $28,335 Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110 Difference ($28,335 – $20,110)………………………………………………… $ 8,225

Shipway Company’s income would be $8,225 higher under the direct write-off method than under the allowance method.

Apr. 13 Allowance for Doubtful Accounts 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500

Allowance for Doubtful Accounts 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450

Allowance for Doubtful Accounts 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Allowance for Doubtful Accounts 13,510

Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 Bad Debt Expense 28,335 Allowance for Doubtful Accounts 28,335 Uncollectible accounts estimate ($3,778,000 × 0.75% = $28,335).


Ex. 9–14 a.

June 8 Bad Debt Expense 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000

Bad Debt Expense 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Bad Debt Expense 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Bad Debt Expense 24,955

Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 No entry


Ex. 9–14 (Continued) b. Computations:

Aging Class (Number of Days

Past Due)

Receivables Balance on

December 31

Estimated Doubtful Accounts

Percent Amount 0–30 days $320,000 1% $ 3,200 31–60 days 110,000 3% 3,300 61–90 days 24,000 10% 2,400 91–120 days 18,000 33% 5,940 More than 120 days 43,000 75% 32,250

Total receivables $515,000 $47,090 Estimated balance of allowance account from aging schedule………………… $47,090 Unadjusted credit balance of allowance account*………………………………… 1,545 Adjustment………………………………………………………………………………… $45,545

* $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545

June 8 Allowance for Doubtful Accounts 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000

Allowance for Doubtful Accounts 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Allowance for Doubtful Accounts 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Allowance for Doubtful Accounts 24,955

Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 Bad Debt Expense 45,545 Allowance for Doubtful Accounts 45,545 Uncollectible accounts estimate ($47,090 – $1,545).


Ex. 9–14 (Concluded) c. Bad debt expense under:

Allowance method……………………………………………………………… $45,545 Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)…………… 34,455 Difference………………………………………………………………………… $11,090

Rustic Tables’ income would be $11,090 higher under the direct write-off method than under the allowance method.

Ex. 9–15 $482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)] Ex. 9–16 a. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)] b. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000) Ex. 9–17 a. b. c. Net income would have been $9,375 higher in 2016 under the direct write-off

method because bad debt expense would have been $9,375 higher under the allowance method ($39,375 expense under the allowance method versus $30,000 expense under the direct write-off method).

Bad Debt Expense 30,000 Accounts Receivable—Shawn Brooke 4,650 Accounts Receivable—Eve Denton 5,180 Accounts Receivable—Art Malloy 11,050 Accounts Receivable—Cassie Yost 9,120

Allowance for Doubtful Accounts 30,000 Accounts Receivable—Shawn Brooke 4,650 Accounts Receivable—Eve Denton 5,180 Accounts Receivable—Art Malloy 11,050 Accounts Receivable—Cassie Yost 9,120

Bad Debt Expense 39,375

Allowance for Doubtful Accounts 39,375 Uncollectible accounts estimate

($5,250,000 × 0.75% = $39,375).


Ex. 9–18 a. b. Computations:

Aging Class (Number of Days

Past Due)

Receivables Balance on

December 31

Estimated Doubtful Accounts

Percent Amount 0–30 days $ 715,000 1% $ 7,150 31–60 days 310,000 2% 6,200 61–90 days 102,000 15% 15,300 91–120 days 76,000 30% 22,800 More than 120 days 97,000 60% 58,200

Total receivables $1,300,000 $109,650 Unadjusted debit balance of Allowance for Doubtful Accounts

($102,500 – $95,000)…………………………………………………………………… $ 7,500 Estimated balance of Allowance for Doubtful Accounts

from aging schedule…………………………………………………………………… 109,650 Adjustment………………………………………………………………………………… $117,150 c. Net income would have been $14,650 lower in 2016 under the allowance

method because bad debt expense would have been $14,650 higher under the allowance method ($117,150 expense under the allowance method versus $102,500 expense under the direct write-off method).

Bad Debt Expense 102,500 Accounts Receivable—Kim Abel 21,550 Accounts Receivable—Lee Drake 33,925 Accounts Receivable—Jenny Green 27,565 Accounts Receivable—Mike Lamb 19,460

Allowance for Doubtful Accounts 102,500 Accounts Receivable—Kim Abel 21,550 Accounts Receivable—Lee Drake 33,925 Accounts Receivable—Jenny Green 27,565 Accounts Receivable—Mike Lamb 19,460

Bad Debt Expense 117,150

Allowance for Doubtful Accounts 117,150 Uncollectible accounts estimate

($109,650 + $7,500).


Ex. 9–19

Due Date Interest a. $1,600 [$80,000 × 0.06 × (120 ÷ 360)] b. March 21 90 [$27,000 × 0.04 × (30 ÷ 360)] c. July 8 625 [$62,500 × 0.08 × (45 ÷ 360)] d. Nov.28 375 [$30,000 × 0.05 × (90 ÷ 360)] e. Jan. 2 700 [$40,000 × 0.07 × (90 ÷ 360)] Ex. 9–20 a. November 10 (17 + 30 + 31 + 31 + 30 + 31 + 10) b. $77,250 [($75,000 × 6% × 180 ÷ 360) + $75,000] c. (1)

(2)

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.

May 2

Notes Receivable 75,000 Accounts Rec.—Master Designs Decorators 75,000

Cash 77,250 Notes Receivable 75,000 Interest Revenue 2,250


Ex. 9–22 2015 Dec. 3 Notes Receivable 36,000

Accounts Receivable—Chicago Clothing & Bags Co. 36,000 31 Interest Receivable 168 Interest Revenue 168 Accrued interest ($36,000 × 0.06 × 28 ÷ 360 = $168). 31 Interest Revenue 168 Income Summary 168 2016 Mar. 2 Cash 36,540

Notes Receivable 36,000 Interest Receivable 168 Interest Revenue 372 ($36,000 × 0.06 × 62 ÷ 360). Ex. 9–23 June 23 Notes Receivable 48,000

Accounts Receivable—Radon Express Co. 48,000 Sept. 21 Accounts Receivable—Radon Express Co. 48,960

Notes Receivable 48,000 Interest Revenue 960 ($48,000 × 0.08 × 90 ÷ 360). Oct. 21 Cash 49,368

Accounts Receivable—Radon Express Co. 48,960 Interest Revenue 408 ($48,960 × 0.10 × 30 ÷ 360).


Ex. 9–24 Apr. 18 Notes Receivable 60,000

Accounts Receivable—Glenn Cross 60,000 30 Notes Receivable 42,000 Accounts Receivable—Rhoni Melville 42,000 May 18 Accounts Receivable—Glenn Cross 60,350

Notes Receivable 60,000 Interest Revenue 350 ($60,000 × 7% × 30 ÷ 360). June 29 Accounts Receivable—Rhoni Melville 42,560

Notes Receivable 42,000 Interest Revenue 560 ($42,000 × 8% × 60 ÷ 360). Aug. 16 Cash 61,557

Accounts Receivable—Glenn Cross 60,350 Interest Revenue 1,207 ($60,350 × 8% × 90 ÷ 360). Oct. 22 Allowance for Doubtful Accounts 42,560

Accounts Receivable—Rhoni Melville 42,560

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:

NAPA VINO COMPANY Balance Sheet

December 31, 2016 Assets

Current assets: Cash $ 78,500 Notes receivable 300,000 Accounts receivable $1,200,000

Less allowance for doubtful accounts 11,500 1,188,500 Interest receivable 4,500


Ex. 9–26 a. and b.

Sales………………………………

Year 2 Year 1

$6,859,500 $5,660,300 Accounts receivable…………… Average accts. receivable…… Accts. receivable turnover……

$690,000 $641,350

[($690,000 + $592,700) ÷ 2] 10.7

$592,700 $539,450

[($592,700 + $486,200) ÷ 2] 10.5

($6,859,500 ÷ $641,350) ($5,660,300 ÷ $539,450) Average daily sales…………… Days’ sales in receivables……

$18,793.2

($6,859,500 ÷ 365) 34.1

$15,507.7

($5,660,300 ÷ 365) 34.8

($641,350 ÷ $18,793.2) ($539,450 ÷ $15,507.7) c. The accounts receivable turnover indicates a slight increase in the efficiency of

collecting accounts receivable by increasing from 10.5 to 10.7, a favorable trend. The days’ sales in receivables also indicates an increase in the efficiency of collecting accounts receivable by decreasing from 34.8 to 34.1, which is a favorable trend. However, before reaching a final conclusion, the ratios should be compared with industry averages and similar firms.

Ex. 9–27 a. and b.

Year 2 Year 1 Sales……………………………… Accounts receivable…………… Average accts. receivable…… Accts. receivable turnover……

$11,649,079 $10,706,588

$993,510 $1,265,032 $1,129,271 $1,155,185

[($993,510 + $1,265,032) ÷ 2] [($1,265,032 + $1,045,338) ÷ 2] 10.3 9.3

($11,649,079 ÷ $1,129,271) ($10,706,588 ÷ $1,155,185) Average daily sales…………… Days’ sales in receivables……

$31,915.3 $29,333.1

($11,649,079 ÷ 365) ($10,706,588 ÷ 365) 35.4 39.4

($1,129,271 ÷ $31,915.3) ($1,155,185 ÷ $29,333.1) c. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 9.3 to 10.3, a favorable trend. The number of days’ sales in receivables decreased from 39.4 to 35.4 days, also indicating a favorable trend in collections of receivables. These are favorable trends; 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.

Year 2 Year 1 Sales……………………………… Accounts receivable……………

$10,364 $9,613 $ 269 $ 267

Average accts. receivable……… $ 268 $ 258 [($269 + $267) ÷ 2] [($267 + $249) ÷ 2]

Accts. receivable turnover……… 38.7 37.3 ($10,364 ÷ $268) ($9,613 ÷ $258)

Average daily sales……………… Days’ sales in receivables………

$28.4

($10,364 ÷ 365) 9.4

$26.3

($9,613 ÷ 365) 9.8

($268 ÷ $28.4) ($258 ÷ $26.3) c. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 37.3 to 38.7, a favorable trend. The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 9.8 to 9.4, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.


Ex. 9–29 a. The average accounts receivable turnover ratios are as follows:

The Limited Brands Inc.: 38.0 [(38.7 + 37.3) ÷ 2] H.J. Heinz Company: 9.8 [(10.3 + 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. Thus, we would expect Heinz’s average accounts receivable turnover ratio to be lower than The Limited Brands, as shown in (a).


PROBLEMS Prob. 9–1A 2.

Feb. 8 Cash 7,200

Allowance for Doubtful Accounts 10,800 Accounts Receivable—DeCoy Co. 18,000 May 27 Accounts Receivable—Seth Nelsen 7,350

Allowance for Doubtful Accounts 7,350 27 Cash 7,350 Accounts Receivable—Seth Nelsen 7,350 Aug. 13 Allowance for Doubtful Accounts 6,400

Accounts Receivable—Kat Tracks Co. 6,400 Oct. 31 Accounts Receivable—Crawford Co. 3,880

Allowance for Doubtful Accounts 3,880 31 Cash 3,880 Accounts Receivable—Crawford Co. 3,880 Dec. 31 Allowance for Doubtful Accounts 23,200

Accounts Receivable—Newbauer Co. 7,190 Accounts Receivable—Bonneville Co. 5,500 Accounts Receivable—Crow Distributors 9,400 Accounts Receivable—Fiber Optics 1,110 31 Bad Debt Expense 38,870 Allowance for Doubtful Accounts 38,870 Uncollectible accounts estimate ($35,700 + $3,170).


Prob. 9–1A (Concluded) 1. and 2.

Allowance for Doubtful Accounts Feb. 8 10,800 Jan. 1 Balance 26,000 Aug. 13 6,400 May 27 7,350 Dec. 31 23,200 Oct. 31 3,880

Dec. 31 Unadjusted Balance 3,170 Dec. 31 Adjusting Entry 38,870 Dec. 31 Adj. Balance 35,700

Bad Debt Expense Dec. 31 Adjusting Entry 38,870 3. $1,749,300 ($1,785,000 – $35,700) 4. a. $45,500 ($18,200,000 × 0.0025)

b. $42,330 ($45,500 – $3,170) c. $1,742,670 ($1,785,000 – $42,330)


Prob. 9–2A 1.

Customer Due Date Number of Days Past Due Adams Sports & Flies May 22, 2015 223 days (9 + 30 + 31 + 31 + 30 + 31 + 30 + 31) Blue Dun Flies Oct. 10, 2015 82 days (21 + 30 + 31) Cicada Fish Co. Sept. 29, 2015 93 days (1 + 31 + 30 + 31) Deschutes Sports Oct. 20, 2015 72 days (11 + 30 + 31) Green River Sports Nov. 7, 2015 54 days (23 + 31) Smith River Co. Nov. 28, 2015 33 days (2 + 31) Western Trout Company Dec. 7, 2015 24 days Wolfe Sports Jan. 20, 2016 Not past due

2. and 3. Aging of Receivables Schedule

December 31, 2015 Customer

Balance

Not Past Due


31–60

61–90

91–120

Over 120

AAA Outfitters 20,000 20,000 Brown Trout Fly Shop 7,500 7,500 Zigs Fish Adventures 4,000 4,000 Subtotals 1,300,000 750,000 290,000 120,000 40,000 20,000 80,000 Adams Sports & Flies 5,000 5,000 Blue Dun Flies 4,900 4,900 Cicada Fish Co. 8,400 8,400 Deschutes Sports 7,000 7,000 Green River Sports 3,500 3,500 Smith River Co. 2,400 2,400 Western Trout Company 6,800 6,800 Wolfe Sports 4,400 4,400 Totals 1,342,400 754,400 296,800 125,900 51,900 28,400 85,000 Percentage uncollectible 1% 2% 10% 30% 40% 80% Estimate of uncollectible

accounts 121,000 7,544 5,936 12,590 15,570 11,360 68,000


Prob. 9–2A (Concluded) 4. 5. On the balance sheet, assets would be overstated by $124,600 because the

allowance for doubtful accounts would be understated by $124,600. In addition, the owner’s capital account would be overstated by $124,600 because bad debt expense would be understated and net income overstated by $124,600 on the income statement.

Bad Debt Expense 124,600 Allowance for Doubtful Accounts 124,600

Uncollectible accounts estimate ($121,000 + $3,600).


Prob. 9–3A 1. 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% of sales. The total write-off of receivables originating in the first year amounted to $8,500 ($4,500 + $3,000 + $1,000), as compared with bad debt expense, based on the percentage of sales, of $9,000 ($900,000 × 1%). For the second year, the comparable amounts were $11,800 ($6,600 + $3,700 + $1,500) and $12,500 ($1,250,000 × 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 $ 4,500 $ 9,000 $4,500 $ 4,500 2nd 9,600 12,500 2,900 7,400 3rd 12,800 15,000 2,200 9,600 4th 16,550 22,000 5,450 15,050


Prob. 9–4A 1.

Note

(a) Due Date

(b) Interest Due at Maturity

1. $500 2. 360 3. 840 4. 945 5. 270 6. Jan. 29 300

($80,000 × 45 ÷ 360 × 5%) ($24,000 × 60 ÷ 360 × 9%) ($42,000 × 120 ÷ 360 × 6%) ($54,000 × 90 ÷ 360 × 7%) ($27,000 × 60 ÷ 360 × 6%) ($72,000 × 30 ÷ 360 × 5%)

2. 3. 4.

Apr. 20 June 22 Nov. 17 Dec. 5 Jan. 28

Nov. 17 Accounts Receivable 42,840 Notes Receivable 42,000 Interest Revenue 840

Dec. 31 Interest Receivable 154 Interest Revenue 154 Accrued interest. $27,000 × 6% × 32 ÷ 360 = $144 $72,000 × 5% × 1 ÷ 360 10 Total $154

Jan. 28 Cash 27,270 Notes Receivable 27,000 Interest Receivable 144 Interest Revenue 126 ($27,000 × 6% × 28 ÷ 360). 29 Cash 72,300 Notes Receivable 72,000 Interest Receivable 10 Interest Revenue 290 ($72,000 × 5% × 29 ÷ 360).


Prob. 9–5A

Apr. 10 Notes Receivable 144,000 Accounts Receivable 144,000 May 15 Notes Receivable 270,000

Accounts Receivable 270,000 June 9 Cash 145,200

Notes Receivable 144,000 Interest Revenue 1,200 Aug. 22 Notes Receivable 150,000

Accounts Receivable 150,000 Sept. 12 Cash 276,300

Notes Receivable 270,000 Interest Revenue 6,300 30 Notes Receivable 210,000 Accounts Receivable 210,000 Oct. 6 Cash 150,750

Notes Receivable 150,000 Interest Revenue 750 18 Notes Receivable 120,000 Accounts Receivable 120,000 Nov. 29 Cash 212,800

Notes Receivable 210,000 Interest Revenue 2,800 Dec. 17 Cash 121,000

Notes Receivable 120,000 Interest Revenue 1,000


Prob. 9–6A

Jan. 3 Notes Receivable 18,000 Cash 18,000 Feb. 10 Accounts Receivable—Bradford & Co. 24,000

Sales 24,000 10 Cost of Merchandise Sold 14,400 Merchandise Inventory 14,400 13 Accounts Receivable—Dry Creek Co. 60,000 Sales 60,000 13 Cost of Merchandise Sold 54,000 Merchandise Inventory 54,000 Mar. 12 Notes Receivable 24,000

Accounts Receivable—Bradford & Co. 24,000 14 Notes Receivable 60,000 Accounts Receivable—Dry Creek Co. 60,000 Apr. 3 Notes Receivable 18,000

Cash 360 Notes Receivable 18,000 Interest Revenue 360 ($18,000 × 8% × 90 ÷ 360). May 11 Cash 24,280

Notes Receivable 24,000 Interest Revenue 280 ($24,000 × 7% × 60 ÷ 360). 13 Accounts Receivable—Dry Creek Co. 60,900 Notes Receivable 60,000 Interest Revenue 900 ($60,000 × 9% × 60 ÷ 360). July 12 Cash 62,118

Accounts Receivable—Dry Creek Co. 60,900 Interest Revenue 1,218 ($60,900 × 12% × 60 ÷ 360).


Prob. 9–6A (Concluded)

Aug. 1 Cash 18,540 Notes Receivable 18,000 Interest Revenue 540 ($18,000 × 9% × 120 ÷ 360). Oct. 5 Accounts Receivable—Halloran Co. 13,500

Sales 13,500 5 Cost of Merchandise Sold 8,100 Merchandise Inventory 8,100 15 Cash 13,230 Sales Discounts 270 Accounts Receivable—Halloran Co. 13,500


Prob. 9–1B 2.

Jan. 19 Accounts Receivable—Arlene Gurley 2,660

Allowance for Doubtful Accounts 2,660 19 Cash 2,660 Accounts Receivable—Arlene Gurley 2,660 Apr. 3 Allowance for Doubtful Accounts 12,750

Accounts Receivable—Premier GS Co. 12,750 July 16 Cash 5,500

Allowance for Doubtful Accounts 16,500 Accounts Receivable—Hayden Co. 22,000 Nov. 23 Accounts Receivable—Harry Carr 4,000

Allowance for Doubtful Accounts 4,000 23 Cash 4,000 Accounts Receivable—Harry Carr 4,000 Dec. 31 Allowance for Doubtful Accounts 24,000

Accounts Receivable—Cavey Co. 3,300 Accounts Receivable—Fogle Co. 8,100 Accounts Receivable—Lake Furniture 11,400 Accounts Receivable—Melinda Shryer 1,200 31 Bad Debt Expense 56,590 Allowance for Doubtful Accounts 56,590 Uncollectible accounts estimate ($60,000 – $3,410).


Prob. 9–1B (Concluded) 1. and 2.

Allowance for Doubtful Accounts Apr. 3 12,750 Jan. 1 Balance 50,000 July 16 16,500 Jan. 19 2,660 Dec. 31 24,000 Nov. 23 4,000 Dec. 31 Unadjusted Balance 3,410 Dec. 31 Adjusting Entry 56,590 Dec. 31 Adjusted Balance 60,000

Bad Debt Expense Dec. 31 Adjusting Entry 56,590 3. $2,290,000 ($2,350,000 – $60,000) 4. a. $79,000 ($15,800,000 × 0.005)

b. $82,410 ($79,000 + $3,410) c. $2,267,590 ($2,350,000 – $82,410)


Prob. 9–2B 1.

Customer Due Date Number of Days Past Due Arcade Beauty Aug. 17, 2015 136 days (14 + 30 + 31 + 30 + 31) Creative Images Oct. 30, 2015 62 days (1 + 30 + 31) Excel Hair Products July 3, 2015 181 days (28 + 31 + 30 + 31 + 30 + 31) First Class Hair Care Sept. 8, 2015 114 days (22 + 31 + 30 + 31) Golden Images Nov. 23, 2015 38 days (7 + 31) Oh That Hair Nov. 29, 2015 32 days (1 + 31) One Stop Hair Designs Dec. 7, 2015 24 days Visions Hair & Nail Jan. 11, 2016 Not past due

2. and 3. Aging of Receivables Schedule

December 31, 2015 Customer

Balance

Not Past Due


31–60

61–90

91–120

Over 120

ABC Beauty 15,000 15,000 Angel Wigs 8,000 8,000 Zodiac Beauty 3,000 3,000 Subtotals 875,000 415,000 210,000 112,000 55,000 18,000 65,000 Arcade Beauty 10,000 10,000 Creative Images 8,500 8,500 Excel Hair Products 7,500 7,500 First Class Hair Care 6,600 6,600 Golden Images 3,600 3,600 Oh That Hair 1,400 1,400 One Stop Hair Designs 4,000 4,000 Visions Hair & Nail 9,000 9,000 Totals 925,600 424,000 214,000 117,000 63,500 24,600 82,500 Percentage uncollectible 1% 4% 16% 25% 40% 80% Estimate of uncollectible

accounts 123,235 4,240 8,560 18,720 15,875 9,840 66,000


Prob. 9–2B (Concluded) 4. 5. On the balance sheet, assets would be overstated by $115,860 because the

allowance for doubtful accounts would be understated by $115,860. In addition, the owner’s capital account would be overstated by $115,860 because bad debt expense would be understated and net income overstated by $115,860 on the income statement.

Bad Debt Expense 115,860 Allowance for Doubtful Accounts 115,860

Uncollectible accounts estimate ($123,235 – $7,375).


Prob. 9–3B 1. 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 1/4% of sales. The total write-off of receivables originating in the first year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt expense based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025). For the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025).

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 $18,000 $31,250 $13,250 $13,250 2nd 30,200 37,000 6,800 20,050 3rd 39,900 45,000 5,100 25,150 4th 52,600 60,000 7,400 32,550


Prob. 9–4B 1.

Note

(a) Due Date

(b) Interest Due at Maturity

1. $110 2. 525 3. 600 4. 200 5. 480 6. Feb. 8 240

($33,000 × 30 ÷ 360 × 4%) ($60,000 × 45 ÷ 360 × 7%) ($48,000 × 90 ÷ 360 × 5%) ($16,000 × 75 ÷ 360 × 6%) ($36,000 × 60 ÷ 360 × 8%) ($24,000 × 60 ÷ 360 × 6%)

2. 3. 4.

Feb. 13 Apr. 23 Oct. 10 Nov. 6 Jan. 14

Oct. 10 Accounts Receivable 48,600 Notes Receivable 48,000 Interest Revenue 600 Dec. 31 Interest Receivable 452

Interest Revenue 452 Accrued interest. $36,000 × 8% × 46 ÷ 360 = $368 $24,000 × 6% × 21 ÷ 360 84 Total $452 Jan. 14 Cash 36,480

Notes Receivable 36,000 Interest Receivable 368 Interest Revenue 112 ($36,000 × 8% × 14 ÷ 360). Feb. 8 Cash 24,240

Notes Receivable 24,000 Interest Receivable 84 Interest Revenue 156 ($24,000 × 6% × 39 ÷ 360).


Prob. 9–5B

Mar. 8 Notes Receivable 33,000 Accounts Receivable 33,000 31 Notes Receivable 80,000 Accounts Receivable 80,000 May 7 Cash 33,275

Notes Receivable 33,000 Interest Revenue 275 16 Notes Receivable 72,000 Accounts Receivable 72,000 June 11 Notes Receivable 36,000

Accounts Receivable 36,000 29 Cash 81,400 Notes Receivable 80,000 Interest Revenue 1,400 July 26 Cash 36,270

Notes Receivable 36,000 Interest Revenue 270 Aug. 4 Notes Receivable 48,000

Accounts Receivable 48,000 14 Cash 73,260 Notes Receivable 72,000 Interest Revenue 1,260 Dec. 2 Cash 49,440

Notes Receivable 48,000 Interest Revenue 1,440


Prob. 9–6B

Jan. 21 Accounts Receivable—Black Tie Co. 28,000

Sales 28,000 21 Cost of Merchandise Sold 16,800 Merchandise Inventory 16,800 Mar. 18 Notes Receivable 28,000

Accounts Receivable—Black Tie Co. 28,000 May 17 Cash 28,280

Notes Receivable 28,000 Interest Revenue 280 ($28,000 × 6% × 60 ÷ 360). June 15 Accounts Receivable—Pioneer Co. 17,700

Sales 17,700 15 Cost of Merchandise Sold 10,600 Merchandise Inventory 10,600 21 Notes Receivable 18,000 Cash 18,000 25 Cash 17,700 Accounts Receivable—Pioneer Co. 17,700 July 21 Notes Receivable 18,000

Cash 120 Notes Receivable 18,000 Interest Revenue 120 ($18,000 × 8% × 30 ÷ 360). Sept. 19 Cash 18,270

Notes Receivable 18,000 Interest Revenue 270 ($18,000 × 9% × 60 ÷ 360). 22 Accounts Receivable—Wycoff Co. 20,000 Sales 20,000


Prob. 9–6B (Concluded)

Sept. 22 Cost of Merchandise Sold 12,000 Merchandise Inventory 12,000 Oct. 14 Notes Receivable 20,000

Accounts Receivable—Wycoff Co. 20,000 Nov. 13 Accounts Receivable—Wycoff Co. 20,100

Notes Receivable 20,000 Interest Revenue 100 ($20,000 × 6% × 30 ÷ 360). Dec. 28 Cash 20,301

Accounts Receivable—Wycoff Co. 20,100 Interest Revenue 201 ($20,100 × 8% × 45 ÷ 360).


CASES & PROJECTS

CP 9–1 By computing interest using a 365-day year for depository accounts (liabilities), Bev is minimizing interest expense to the bank. By computing interest using a 360-day year for loans (assets), Bev 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, Bev is behaving in an unprofessional manner. CP 9–2 1. a.

Addition to Allowance

b.

Accounts Written Year for Doubtful Accounts Off During Year 2013 2014 2015 2016

$20,000 $15,000 ($20,000 – $5,000) 22,000 18,750 ($5,000 + $22,000 – $8,250) 24,000 22,050 ($8,250 + $24,000 – $10,200) 25,500 21,300 ($10,200 + $25,500 – $14,400)

2. a. The estimate of 1/2 of 1% of credit sales may be too large because 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 accounts receivable subsidiary ledger for collectibility and comparing the result with the balance in the allowance for doubtful accounts.

Note to Instructors: Because the allowance for doubtful accounts increased by 188% [($14,400 – $5,000) ÷ $5,000], while sales have increased by 27.5% [($5,100,000 – $4,000,000) ÷ $4,000,000], the increase cannot be explained by an expanding volume of sales.


CP 9–2 (Concluded)

b. The balance of Allowance for Doubtful Accounts that should exist at December 31, 2016, can only be determined after all attempts have been made to collect the receivables on hand at December 31, 2016. However, the account balances at December 31, 2016, 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 Xtreme 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.

Year 2 Year 1 Sales…………………………… Accounts receivable…………

$50,705 $49,747 $2,288 $2,348

Average accts. receivable…… $2,318.0 $2,184.0 [($2,288 + $2,348) ÷ 2] [($2,348 + $2,020) ÷ 2]

Accts. receivable turnover…… 21.9 22.8 ($50,705 ÷ $2,318.0) ($49,747 ÷ $2,184.0)

Average daily sales…………… Days’ sales in receivables……

$138.9

($50,705 ÷ 365) 16.7

$136.3

($49,747 ÷ 365) 16.0

($2,318.0 ÷ $138.9) ($2,184.0 ÷ $136.3) 3. The accounts receivable turnover indicates a decrease in the efficiency of

collecting accounts receivable by decreasing from 22.8 to 21.9, an unfavorable trend. The days’ sales in receivables increased from 16.0 days to 16.7, an unfavorable trend. Thus, based on (1) and (2), Best Buy has decreased its efficiency in the collection of receivables.


CP 9–3 (Concluded) 4. 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.

CP 9–4 1. Year 2: 8.9 {$156,508 ÷ [($21,275 + $13,731) ÷ 2]}

Year 1: 8.6 {$108,249 ÷ [($13,731 + $11,560) ÷ 2]} 2. Year 2: 40.8 days [($21,275 + $13,731) ÷ 2] = $17,503.0; [$17,503.0 ÷ ($156,508 ÷ 365)]

Year 1: 42.6 days [($13,731 + $11,560) ÷ 2] = $12,645.5; [$12,645.5 ÷ ($108,249 ÷ 365)] 3. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 8.6 to 8.9, a favorable trend. The days’ sales in receivables decreased from 42.6 days to 40.8, a favorable trend. Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.


CP 9–5 1. and 2.

Sales………………………………… Accounts receivable……………… Average accts. receivable…………

Year 2 Year 1 $99,137 $88,915 $1,576 $1,455

$1,515.5 $1,388.0 Accts. receivable turnover…………

[($1,576 + $1,455) ÷ 2]

65.4 ($99,137 ÷ $1,515.5)

[($1,455 + $1,321) ÷ 2]

64.1 ($88,915 ÷ $1,388.0)

Average daily sales………………… Days’ sales in receivables…………

$271.6 $243.6

($99,137 ÷ 365) ($88,915 ÷ 365) 5.6 5.7

($1,515.5 ÷ $271.6) ($1,388.0 ÷ $243.6) 3. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 64.1 to 65.4, a favorable trend. The days’ sales in receivables decreased from 5.7 days to 5.6 days, a favorable trend. Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.

4. Costco’s accounts receivable turnover would normally be higher than that of a

typical manufacturing company such as H.J. Heinz Company. This is because many of Costco’s customers charge their purchases to American Express cards or pay with checks or cash. In contrast, the customers of H.J. Heinz Company 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 10.3 (see Ex. 9–27).

Note: Costco does not accept MasterCard or Visa, but only American Express.


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. ……………………………… 12.9 AutoZone, Inc. ………………………… 56.8 Barnes & Noble, Inc. ………………… 45.9 Caterpillar ……………………………… 3.3 The Coca-Cola Company …………… 9.9 Delta Air Lines ………………………… 17.5 The Home Depot ……………………… 60.4 IBM ……………………………………… 3.3 Kroger …………………………………… 100.8 Procter & Gamble ……………………… 11.6 Walmart ………………………………… 81.1 Whirlpool Corporation ………………… 7.3

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 Walmart

2. The companies with accounts receivable turnover ratios above 15 are all

companies selling primarily to individual consumers. In contrast, companies with turnover ratios below 15 are companies selling primarily to other businesses. Generally, we would expect companies selling to individual 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.


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