EXERCISES. b. Johnson & Johnson: 3.3% ($333,000,000 $9,979,000,000)
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1 EXERCISES Ex. 8 1 Accounts receivable from the U.S. government are significantly different from receivables from commercial aircraft carriers such as Delta and United. Thus, Boeing should report each type of receivable separately. In the December 31, 2009, filing with the Securities and Exchange Commission, Boeing reports the receivables together on the balance sheet, but discloses each receivable separately in a note to the financial statements. Ex. 8 2 a. The MGM Mirage: 20.9% ($97,106,000 $465,580,000) b. Johnson & Johnson: 3.3% ($333,000,000 $9,979,000,000) c. Casino operations experience greater bad debt risk, since it is difficult to control the creditworthiness of customers entering the casino. In addition, individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling. In contrast, Johnson & Johnson s customers are primarily other businesses such as grocery store chains. Ex. 8 3 Feb. 13 Accounts Receivable Dr. Ben Katz ,000 Sales , Cost of Merchandise Sold... 72,000 Merchandise Inventory... 72,000 May 4 Cash... 90,000 Bad Debt Expense... 30,000 Accounts Receivable Dr. Ben Katz ,000 Nov. 19 Accounts Receivable Dr. Ben Katz... 30,000 Bad Debt Expense... 30, Cash... 30,000 Accounts Receivable Dr. Ben Katz... 30,
2 Ex. 8 4 Feb. 11 Accounts Receivable Dakota Co ,000 Sales... 29, Cost of Merchandise Sold... 17,400 Merchandise Inventory... 17,400 Apr. 15 Cash... 7,500 Allowance for Doubtful Accounts... 21,500 Accounts Receivable Dakota Co ,000 Sept. 3 Accounts Receivable Dakota Co ,500 Allowance for Doubtful Accounts... 21,500 3 Cash... 21,500 Accounts Receivable Dakota Co ,500 Ex. 8 5 a. Bad Debt Expense... 12,950 Accounts Receivable Aaron Guzman... 12,950 b. Allowance for Doubtful Accounts... 12,950 Accounts Receivable Aaron Guzman... 12,950 Ex. 8 6 a. $80,000 ($16,000, ) b. $82,000 ($77,000 + $5,000) c. $40,000 ($16,000, ) d. $36,000 ($43,500 $7,500) Ex. 8 7 Account Due Date Number of Days Past Due Alpha Auto May ( ) Best Auto July 8 23 (31 8) Downtown Repair March ( ) Lucky s Auto Repair June 1 60 ( ) Pit Stop Auto June 3 58 ( ) Sally s April ( ) Trident Auto May ( ) Washburn Repair & Tow March ( ) 470
3 Ex. 8 8 a. Customer Due Date Number of Days Past Due Beltran Industries July days ( ) Doodle Company September days ( ) La Corp Inc. October days ( ) 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 Over 90 5 Able Brothers Inc. 3,000 3,000 6 Accent Company 4,500 4, Zumpano Company 5,000 5, Subtotals 830, , ,000 80,000 45,000 25, Beltran Industries 12,000 12, Doodle Company 8,000 8, La Corp Inc. 17,000 17, VIP Sales Company 10,000 10, We-Go Company 23,000 23, Totals 900, , ,000 97,000 53,000 37,000 Ex. 8 9 Days Past Due Not Past Over Balance Due Total receivables 900, , ,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,
4 Ex Nov. 30 Bad Debt Expense... 53,850 Allowance for Doubtful Accounts... 53,850 Uncollectible accounts estimate. ($68,130 $14,280) Ex Estimated Uncollectible Accounts Age Interval Balance Percent Amount Not past due... $600,000 ¼% $ 1, days past due , , days past due... 60, , days past due... 45, , days past due... 26, ,400 Over 180 days past due... 24, ,000 Total... $875,000 $38,600 Ex Dec. 31 Bad Debt Expense... 40,000 Allowance for Doubtful Accounts... 40,000 Uncollectible accounts estimate. ($38,600 + $1,400) 472
5 Ex a. Jan. 27 Bad Debt Expense... 6,000 Accounts Receivable C. Knoll... 6,000 Feb. 17 Cash... 1,000 Bad Debt Expense... 2,000 Accounts Receivable Joni Lester... 3,000 Mar. 3 Accounts Receivable C. Knoll... 6,000 Bad Debt Expense... 6,000 3 Cash... 6,000 Accounts Receivable C. Knoll... 6,000 Dec. 31 Bad Debt Expense... 11,100 Accounts Receivable Jason Short... 4,500 Accounts Receivable Kim Snider... 1,500 Accounts Receivable Sue Pascall... 1,100 Accounts Receivable Tracy Lane... 3,500 Accounts Receivable Randy Pape No entry b. Jan. 27 Allowance for Doubtful Accounts... 6,000 Accounts Receivable C. Knoll... 6,000 Feb. 17 Cash... 1,000 Allowance for Doubtful Accounts... 2,000 Accounts Receivable Joni Lester... 3,000 Mar. 3 Accounts Receivable C. Knoll... 6,000 Allowance for Doubtful Accounts... 6,000 3 Cash... 6,000 Accounts Receivable C. Knoll... 6,000 June 30 Allowance for Doubtful Accounts... 11,100 Accounts Receivable Jason Short... 4,500 Accounts Receivable Kim Snider... 1,500 Accounts Receivable Sue Pascall... 1,100 Accounts Receivable Tracy Lane... 3,500 Accounts Receivable Randy Pape Dec. 31 Bad Debt Expense... 28,000 Allowance for Doubtful Accounts... 28,000 Uncollectible accounts estimate. ($1,600,000 1¾% = $28,000) 473
6 Ex (Concluded) c. Bad debt expense under: Allowance method... $28,000 Direct write-off method ($6,000 + $2,000 $6,000 + $11,100)... Difference ($28,000 $13,100)... 13,100 $14,900 Aprilla Company s income would be $14,900 higher under the direct write-off method than under the allowance method. Ex a. Mar. 14 Bad Debt Expense... 7,500 Accounts Receivable Myron Rimando 7,500 May 19 Cash... 2,000 Bad Debt Expense... 8,000 Accounts Receivable Shirley Mason.. 10,000 Aug. 7 Accounts Receivable Myron Rimando... 7,500 Bad Debt Expense... 7,500 7 Cash... 7,500 Accounts Receivable Myron Rimando 7,500 Dec. 31 Bad Debt Expense... 33,500 Accounts Receivable Brandon Peele. 5,000 Accounts Receivable Clyde Stringer.. 9,000 Accounts Receivable Ned Berry... 13,000 Accounts Receivable Mary Adams... 2,000 Accounts Receivable Gina Bowers... 4, No entry 474
7 Ex (Continued) b. Mar. 4 Allowance for Doubtful Accounts... 7,500 Accounts Receivable Myron Rimando 7,500 May 19 Cash... 2,000 Allowance for Doubtful Accounts... 8,000 Accounts Receivable Shirley Mason.. 10,000 Aug. 7 Accounts Receivable Myron Rimando... 7,500 Allowance for Doubtful Accounts... 7,500 7 Cash... 7,500 Accounts Receivable Myron Rimando 7,500 Dec. 31 Allowance for Doubtful Accounts... 33,500 Accounts Receivable Brandon Peele. 5,000 Accounts Receivable Clyde Stringer.. 9,000 Accounts Receivable Ned Berry... 13,000 Accounts Receivable Mary Adams... 2,000 Accounts Receivable Gina Bowers... 4, 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 0 30 days $300,000 1% $ 3, days 80, , days 20, , days 10, ,000 More than 120 days 40, ,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,
8 Ex (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 Silhouette s income would be $200 higher under the direct method than under the allowance method. Ex $368,000 [$375,000 + $65,000 ($4,800,000 1½%)] Ex a. $437,500 [$450,000 + $70,000 ($5,500,000 1½%)] b. $19,500 [($72,000 $65,000) + ($82,500 $70,000)] Ex a. Bad Debt Expense... 29,000 Accounts Receivable Will Boyette... 10,000 Accounts Receivable Stan Frey... 8,000 Accounts Receivable Tammy Imes... 5,000 Accounts Receivable Shana Wagner... 6,000 b. Allowance for Doubtful Accounts... 29,000 Accounts Receivable Will Boyette... 10,000 Accounts Receivable Stan Frey... 8,000 Accounts Receivable Tammy Imes... 5,000 Accounts Receivable Shana Wagner... 6,000 Bad Debt Expense... 45,000 Allowance for Doubtful Accounts... 45,000 Uncollectible accounts estimate. ($3,000,000 1½% = $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). 476
![$437,500 [$450,000 + $70,000 ($5,500,000 1½%)] b. $19,500 [($72,000 $65,000) + ($82,500 $70,000)] Ex. 8 17 a. Bad Debt Expense... 29,000 Accounts Receivable Will Boyette.](/docs-images/45/10637904/images/page_8.jpg ".. 10,000 Accounts Receivable Stan Frey... 8,000 Accounts Receivable Tammy Imes... 5,000 Accounts Receivable Shana Wagner... 6,000 b. Allowance for Doubtful Accounts.")
9 Ex a. Bad Debt Expense... 57,300 Accounts Receivable Trey Betts... 15,500 Accounts Receivable Cheryl Carson... 9,000 Accounts Receivable Irene Harris... 29,700 Accounts Receivable Renee Putman... 3,100 b. Allowance for Doubtful Accounts... 57,300 Accounts Receivable Trey Betts... 15,500 Accounts Receivable Cheryl Carson... 9,000 Accounts Receivable Irene Harris... 29,700 Accounts Receivable Renee 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 0 30 days $600,000 1% $ 6, days 150, , days 75, , days 50, ,000 More than 120 days 60, ,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 method, because bad debt expense would have been $12,500 higher under the allowance method ($69,800 expense under the allowance method versus $57,300 expense under the direct write-off method). 477
10 Ex Due Date Interest a. Aug. 13 $600 [$40, (90/360)] b. May [$15, (60/360)] c. July [$24, (60/360)] d. Nov [$10, (60/360)] e. Dec [$18, (120/360)] Ex a. July 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 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. 478
11 Ex Dec. 10 Notes Receivable... 36,000 Accounts Receivable Point Loma Clothing & Bags Co , Interest Receivable Interest Revenue Accrued interest. ($36, /360 = $84) 31 Interest Revenue Income Summary Mar. 9 Cash... 36,360 Notes Receivable... 36,000 Interest Receivable Interest Revenue * *$36, /360 Ex May 3 Notes Receivable ,000 Accounts Receivable Sunrider Co ,000 Aug. 31 Accounts Receivable Sunrider Co ,000 Notes Receivable ,000 Interest Revenue... 3,000* *$150, /360 Oct. 30 Cash ,295 Accounts Receivable Sunrider Co ,000 Interest Revenue... 2,295* *$153, /
12 Ex Mar. 1 Notes Receivable... 80,000 Accounts Receivable Tomekia Co , Notes Receivable... 75,000 Accounts Receivable Mystic Co ,000 Apr. 30 Accounts Receivable Tomekia Co ,800 Notes Receivable... 80,000 Interest Revenue * *($80,000 6% 60/360) May 17 Accounts Receivable Mystic Co ,000 Notes Receivable... 75,000 Interest Revenue... 1,000* *($75,000 8% 60/360) July 29 Cash... 82,416 Accounts Receivable Tomeka Co ,800 Interest Revenue... 1,616* *($80, /360) Aug. 23 Allowance for Doubtful Accounts... 76,000 Accounts Receivable Mystic Co ,000 Ex The interest receivable should be reported separately as a current asset. It should not be deducted from notes receivable. 2. The allowance for doubtful accounts should be deducted from accounts receivable. A corrected partial balance sheet would be as follows: TULIPS COMPANY Balance Sheet December 31, 2012 Assets Current assets: Cash... $138,000 Notes receivable ,000 Accounts receivable... $795,000 Less allowance for doubtful accounts... 14, ,500 Interest receivable... 20,
13 Ex a. and b 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 ($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 ($580,850/$13,750.4) ($548,450/$13,370.1) c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 8.9 to 8.6, an unfavorable trend. The days sales in receivables also indicates a decrease in the efficiency of collecting accounts receivable by increasing from 41.0 to 42.2, which is an unfavorable trend. These unfavorable trends are consistent with the economic downturn that occurred worldwide in 2008 and However, before reaching a final conclusion, the ratios should be compared with industry averages and similar firms. Ex a. and b 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 ($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 ($1,166,639/$27,803.0) ($1,079,166.5/$27,591.2) 481
14 Ex (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 However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms. Ex a. and b. For the Period Ending Jan. 31, Jan. 31, Net sales... $8,632 $9,043 Accounts receivable... $249 $313 Average accts. receivable... $281 [($249 + $313)/2] $334 [($313 + $355)/2] Accts. receivable turnover ($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 ($281/$23.6) 13.5 ($334/$24.8) c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 27.1 to 30.7, a favorable trend. The days sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 13.5 to 11.9, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms. 482
15 Ex a. The average accounts receivable turnover ratios are as follows: The Limited Brands Inc.: 28.9 [( )/2] H.J. Heinz Company: 9.0 [( )/2] Note: For computations of the individual ratios, see Ex and Ex b. The Limited Brands has the higher average accounts receivable turnover ratio. c. The Limited Brands operates a specialty retail chain of stores that sell directly to individual consumers. Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales. In contrast, H.J. Heinz manufactures processed foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Heinz products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Heinz to have more accounts receivable than The Limited Brands. In addition, we would expect Heinz s business customers to take a longer period to pay their receivables. Accordingly, we would expect Heinz s average accounts receivable turnover ratio to be lower than The Limited Brands as shown in (a). 483
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