Jan. 6 Accounts Receivable Chose Inc... 9,200 Sales Revenue... 9,200
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1 EXERCISE 8-1 Jan. 6 Accounts Receivable Chose Inc... 9,200 Sales Revenue... 9, Cash ($9,200 $92)... 9,108 Sales Discounts (1% X $9,200) Accounts Receivable Chose Inc... 9,200 EXERCISE 8-2 Jan. 10 Accounts Receivable Pitt... 1,700 Sales Revenue... 1,700 Feb. 12 Cash... 1,100 Accounts Receivable Pitt... 1,100 Mar. 10 Accounts Receivable Pitt... 6 [1% X ($1,700 $1,100)]... 6 EXERCISE 8-3 (a) Accounts Receivable ,000 Sales Revenue ,000 Cash ,000 Accounts Receivable ,000 (b)... 7,300 Accounts Receivable... 7,300 (c) Accounts Receivable... 3, ,100 Cash... 3,100 Accounts Receivable... 3,100 EXERCISE 8-3 (Continued) (d) Bad Debts Expense... 20, ,200
![.. 1,100 Mar. 10 Accounts Receivable Pitt... 6 [1% X ($1,700 $1,100)]... 6 EXERCISE 8-3 (a) Accounts Receivable... 800,000 Sales Revenue... 800,000 Cash.](/docs-images/41/3879331/images/page_1.jpg ".. 763,000 Accounts Receivable... 763,000 (b)... 7,300 Accounts Receivable... 7,300 (c) Accounts Receivable... 3,100... 3,100 Cash... 3,100 Accounts Receivable.")
2 Beg. Bal. 9,000 Write-off 7,300 Recovery 3,100 Bad Debts 20,200 End Bal. 25,000 (e) Accounts Receivable Beg. Bal. 200,000 Collections 763,000 Beg. Bal. 9,000 Sales 800,000 Write-off 7,300 Write-off 7,300 Recovery 3,100 Recovery 3,100 Collections 3,100 Bad Debts 20,200 End Bal. 229,700 End Bal. 25,000 (f) Net realizable value of receivables is $204,700 ($229,700 $25,000) EXERCISE 8-4 (a) Dec. 31 Bad Debts Expense Accounts Receivable Baruth (b) Dec. 31 Bad Debts Expense... 6,700 [($78,000 X 10%) $1,100]... 6,700 (c) Dec. 31 Bad Debts Expense... 6,740 [($78,000 X 8%) + $500]... 6,740
![.. 900 Accounts Receivable Baruth... 900 (b) Dec. 31 Bad Debts Expense... 6,700 [($78,000 X 10%) $1,100]... 6,700 (c) Dec. 31 Bad Debts Expense... 6,740 [($78,000 X 8%) + $500].](/docs-images/41/3879331/images/page_2.jpg ".. 6,740")
3 EXERCISE 8-5 (a) Accounts Receivable Amount % Estimated Uncollectible Current $65,000 2 $1, days past due 12, days past due 10, ,030 Over 90 days past due 7, ,700 $8,675 (b) Mar. 31 Bad Debts Expense... 6,575 ($8,675 $2,100)... 6,575 (c) The total balance of receivables increased from 2011 to However, of concern is the fact that each of the three categories of older accounts increased substantially during That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change. EXERCISE 8-6 December 31, 2011 Bad Debts Expense... 9,500 [(9% X $90,000) + $1,400]... 9,500 May 11, ,200 Accounts Receivable Rast... 1,200 June 12, 2012 Accounts Receivable Rast... 1, ,200 Cash... 1,200 Accounts Receivable Rast... 1,200
4 EXERCISE 8-7 Nov. 1 Notes Receivable... 60,000 Cash... 60,000 Dec. 11 Notes Receivable... 3,600 Sales Revenue... 3, Notes Receivable... 12,000 Accounts Receivable M. Colvin... 12, Interest Receivable * *Calculation of interest revenue: Akey s note: $60,000 X 7% X 2/12 = $700 Mayrl s note: 3,600 X 8% X 20/360 = 16 Colvin s note: 12,000 X 9% X 15/360 = 45 Total accrued interest = $761 EXERCISE May 1 Notes Receivable... 5,000 Accounts Receivable S. Dorsey... 5,000 Dec. 31 Interest Receivable ($5,000 X 6% X 8/12) May 1 Cash... 5,300 Notes Receivable... 5,000 Interest Receivable ($5,000 X 6% X 4/12)
5 EXERCISE 8-9 KOPECKY CORP. Balance Sheet (Partial) October 31, 2012 (in thousands) Receivables Notes receivable... $1,353 Accounts receivable... 2,910 Other receivables Total receivables... $4,452 Less: Allowance for doubtful accounts Net receivables... $4,400 EXERCISE 8-10 (a) 2. Reviewing company ratings in the Dun and Bradstreet Reference Book of American Business. (b) 3. Collecting information on competitors payment period policies. (c) 4. Preparing monthly accounts receivable aging schedule and investigating problem accounts. (d) 5. Calculating the receivables turnover ratio and average collection period. (e) 1. Selling receivables to a factor. EXERCISE 8-11 (a) Receivables turnover ratio = $35,497 = 9.2 times ($3,391+ $4,359)/2 Average collection period = 365 days 9.2 = 39.7 days (b) Accounts receivable comprise 48% ($3,391/$7,116) of the company s total current assets. This is certainly a material component.
6 EXERCISE 8-11 (Continued) (c) The balance in the allowance account increased $38 million ($196 $158) while its accounts receivable decreased $930 million ($3,587 $4,517). As a result, the allowance for uncollectible accounts increased from 3.5% of accounts receivable in 2008 to 5.5% in EXERCISE 8-12 (a) At first glance it appears that Tym s liquidity had deteriorated over the past year since the company s current ratio has fallen from 1.5:1 to 1.3:1. However, it is taking the company less time to collect its accounts receivable as evidenced by the higher receivables turnover ratio. The company also appears to be moving its inventory more quickly as evidenced by the higher inventory turnover ratio. It is possible that the lower current ratio is due to the fact that with improved collections and inventory turnover, the company is carrying fewer current assets and not because the company s liquidity has deteriorated. (b) Changes in the turnover ratios do not directly affect profitability. However, improvements in turnover generally indicate that the company is better able to convert sales to cash. Improved liquidity could allow the company to better manage its cash flows and therefore, indirectly improve profitability. (c) There are several steps that Tym might have taken to improve its receivables and inventory turnover: Receivables - The company could limit credit to only the best customers, however, this could negatively affect sales. - The company could initiate the use of a cash discount to encourage early payment of receivables. - The company could more aggressively monitor collections to encourage customers to pay on time. - The company could sell its receivables to a factor to accelerate cash receipts. EXERCISE 8-12 (Continued) Inventory
7 - The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased more frequently, required inventory levels could be reduced. - Improvements in production processes could reduce the amount of work in process, thereby reducing inventory and improving the turnover ratio. - Moving to a system whereby inventory is only produced as needed, will reduce the amount of finished goods inventory and improve the turnover ratio. However, there is some risk to this option as sales could be lost if stock-outs occur. EXERCISE 8-13 Mar. 3 Cash ($710,000 $28,400) ,600 Service Charge Expense (4% X $710,000)... 28,400 Accounts Receivable ,000 EXERCISE 8-14 One possible reason Office Depot chose to sell its receivables may have been to improve its financial ratios. Other reasons include not wanting to deal with the administration of collecting accounts or the desire to accelerate cash receipts. EXERCISE 8-15 May 10 Cash ($4,000 $152)... 3,848 Service Charge Expense (3.8% X $4,000) Sales Revenue... 4,000
8 EXERCISE 8-16 July 4 Cash ($250 $10) Service Charge Expense (4% X $250) Sales Revenue EXERCISE 8-17 (a) Accounts Receivable Beg 38,000 Sales 380, ,000 Collections End 191,000 Sales Increase in Receivables = Cash Collections $380,000 ($191,000 $38,000) = $227,000 or (b) The quality of earnings ratio is net cash provided by operating activities divided by net income. If accrual sales exceed cash collections, then net income will exceed net cash provided by operating activities, all else being equal. Therefore, this would cause a drop in the quality of earnings ratio. (c) If the company relaxed its credit requirements it should increase its estimated bad debts expense. If it doesn t do this, net income in the current period will likely be overstated. PROBLEM 8-1A (a) Total estimated bad debts Number of Days Outstanding Total Over 120 Accounts receivable $377,000 $222,000 $90,000 $38,000 $15,000 $12,000 % uncollectible 1% 4% 5% 8% 10% Estimated bad debts $10,120 $2,220 $3,600 $1,900 $1,200 $1,200 (b) Bad Debts Expense... 14,120 ($10,120 + $4,000)... 14,120
9 (c)... 5,000 Accounts Receivable... 5,000 (d) Accounts Receivable... 5, ,000 Cash... 5,000 Accounts Receivable... 5,000 (e) If Sellmore.com used 3% of total accounts receivable rather than aging the individual accounts the bad debt expense adjustment would be $15,310 [($377,000 X 3%) + $4,000]. Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense. PROBLEM 8-4A (a) $37,000. (b) $30,600 [($840,000 X 4%) $3,000]. (c) $34,600 [(840,000 X 4%) + $1,000]. (d) The are two major weaknesses with the direct write-off method. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the balance sheet date.
10 PROBLEM 8-5A (a) Dec. 31 Bad Debts Expense ($10,200 $1,500)... 8, ,700 (b) Dec. 31 Bad Debts Expense ($10,200 + $1,500)... 11, ,700 (c)... 2,100 Accounts Receivable... 2,100 (d) Bad Debts Expense... 2,100 Accounts Receivable... 2,100 (e) The advantages of the allowance method over the direct write-off method are: 1. It attempts to match bad debts expense related to uncollectible accounts receivable with sales revenues on the income statement. 2. It attempts to show the cash realizable value of the accounts receivable on the balance sheet. PROBLEM 8-6A Jan. 5 Accounts Receivable Noel Company... 4,000 Sales Revenue... 4,000 Feb. 2 Notes Receivable... 4,000 Accounts Receivable Noel Company... 4, Notes Receivable... 12,000 Sales Revenue... 12, Accounts Receivable Hubbard Co... 5,200 Sales Revenue... 5,200 Apr. 5 Notes Receivable.... 5,200
11 Accounts Receivable Hubbard Co... 5, Cash ($12,000 + $200)... 12,200 Notes Receivable... 12,000 ($12,000 X 10% X 2/12) June 2 Cash ($4,000 + $120)... 4,120 Notes Receivable... 4,000 ($4,000 X 9% X 4/12) June 15 Notes Receivable... 2,000 Sales Revenue... 2,000 PROBLEM 8-3B (a) Dec. 31 Bad Debts Expense... 26,210 ($37,910 $11,700)... 26,210 (a) & (b) Bad Debts Expense 12/31 26, /31 Bal. 11,700 12/31 Bal. 26,210 12/31 26,210 12/31 Bal. 37, / / (b) 2012 (1) Mar Accounts Receivable (2) May 31 Accounts Receivable Allowance for Doubtful Accounts Cash Accounts Receivable
12 (c) 2012 Dec. 31 Bad Debts Expense... 36,100 ($35,300 + $800)... 36,100 PROBLEM 8-8B (a) Oct. 7 Accounts Receivable... 4,600 Sales Revenue... 4, Cash ($600 $18) Service Charge Expense ($600 X 3%) Sales Revenue Cash... 6,090 Notes Receivable... 6,000 ($6,000 X 9% X 60/360) Cash... 3,035 Notes Receivable... 3,000 ($3,000 X 7% X 2/12) Interest Receivable ($9,800 X 6% X 1/12) (b) Notes Receivable Interest Receivable 10/1 Bal. 18,800 10/15 6,000 10/ /25 3,000 10/31 Bal. 9,800 10/31 Bal. 49 Accounts Receivable 10/ 7 4,600 10/31 Bal. 4,600
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