Chapter 9 Receivables 437

Chapter 9 Receivables 437

The following were selected from among the transactions completed by Mair Co. dur-

ing the current year. Mair Co. sells and installs home and business security systems.

Jan. 10. Loaned $12,000 cash to Jas Caudel, receiving a 90-day, 8% note.

Feb. 4. Sold merchandise on account to Periman & Co., $28,000. The cost of the

merchandise sold was $16,500.

13. Sold merchandise on account to Centennial Co., $30,000. The cost of

merchandise sold was $17,600.

Mar. 6. Accepted a 60-day, 6% note for $28,000 from Periman & Co. on account.

14. Accepted a 60-day, 12% note for $30,000 from Centennial Co. on account.

Apr. 10. Received the interest due from Jas Caudel and a new 90-day, 10% note as a

renewal of the loan of January 10. (Record both the debit and the credit to

the notes receivable account.)

May 5. Received from Periman & Co. the amount due on the note of March 6.

13. Centennial Co. dishonored its note dated March 14.

June 12. Received from Centennial Co. the amount owed on the dishonored note,

plus interest for 30 days at 12% computed on the maturity value of the note.

July 9. Received from Jas Caudel the amount due on his note of April 10.

Aug.10. Sold merchandise on account to Lindenfield Co., $13,600. The cost of the mer-

chandise sold was $8,000.

20. Received from Lindenfield Co. the amount of the invoice of August 10, less

1% discount.

InstructionsJournalize the transactions.

PR 9-6BSales and notesreceivabletransactions

obj. 6

Special Activities

Mirna Gaymer, vice president of operations for Rocky Mountain County Bank, has in-

structed the bank’s computer programmer to use a 365-day year to compute interest

on depository accounts (payables). Mirna also instructed the programmer to use a 360-

day year to compute interest on loans (receivables).Discuss whether Mirna is behaving in a professional manner.

SA 9-1Ethics andprofessional conductin business

For several years, Halsey Co.’s sales have been on a “cash only” basis. On January 1,

2007, however, Halsey Co. began offering credit on terms of n/30. The amount of the

adjusting entry to record the estimated uncollectible receivables at the end of each year

has been 1/4 of 1% of credit sales, which is the rate reported as the average for the in-

dustry. Credit sales and the year-end credit balances in Allowance for Doubtful

Accounts for the past four years are as follows:

Allowance forYear Credit Sales Doubtful Accounts

2007 $6,120,000 $ 6,3902008 6,300,000 11,8802009 6,390,000 17,0002010 6,540,000 24,600

Javier Cernao, president of Halsey Co., is concerned that the method used to ac-

count for and write off uncollectible receivables is unsatisfactory. He has asked for your

advice in the analysis of past operations in this area and for recommendations for change.

1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and(b) the accounts written off for each of the four years.

2. a. Advise Javier Cernao as to whether the estimate of 1/4 of 1% of creditsales appears reasonable.

SA 9-2Estimateuncollectibleaccounts

(continued)

Chapter 09.qxd 5/26/08 9:57 PM Page 437

tnewman

Rectangle

tnewman

Rectangle

tnewman

Text Box

Chapter 09

438 Chapter 9 Receivables

b. Assume that after discussing (a) with Javier Cernao, he asked you whataction might be taken to determine what the balance of Allowance for DoubtfulAccounts should be at December 31, 2010, and what possible changes, if any, youmight recommend in accounting for uncollectible receivables. How would yourespond?

Best Buy is a specialty retailer of consumer electronics, including personal computers,

entertainment software, and appliances. Best Buy operates retail stores in addition to

the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi Web sites. For two recent years,

Best Buy reported the following (in millions):

Year Ending

Mar. 3, 2007 Feb. 25, 2006

Net sales $35,934 $30,848Accounts receivable at end of year 548 506

Assume that the accounts receivable (in millions) were $375 at the beginning of the

year ending February 25, 2006.

1. Compute the accounts receivable turnover for 2007 and 2006. Round to one decimalplace.

2. Compute the days’ sales in receivables at the end of 2007 and 2006.3. What conclusions can be drawn from (1) and (2) regarding Best Buy’s effi-

ciency in collecting receivables?4. For its years ending in 2007 and 2006, Circuit City Stores, Inc., has an accounts

receivable turnover of 30.7 and 50.6, respectively. Compare Best Buy’s efficiency incollecting receivables with that of Circuit City.

5. What assumption did we make about sales for the Circuit City and BestBuy ratio computations that might distort the two company ratios and thereforecause the ratios not to be comparable?

SA 9-3Accounts receivableturnover and days’sales in receivables

Apple Computer, Inc., designs, manufactures, and markets personal computers and re-

lated personal computing and communicating solutions for sale primarily to educa-

tion, creative, consumer, and business customers. Substantially all of the company’s

net sales over the last five years are from sales of its Macs, Ipods, and related software

and peripherals. For two recent fiscal years, Apple reported the following (in millions):

Year Ending

Sept. 30, 2006 Sept. 24, 2005

Net sales $19,315 $13,931Accounts receivable at end of year 1,252 895

Assume that the accounts receivable (in millions) were $774 at the beginning of

2005.


2. Compute the days’ sales in receivables at the end of 2006 and 2005.3. What conclusions can be drawn from (1) and (2) regarding Apple’s effi-

ciency in collecting receivables?


EarthLink, Inc., is a nationwide Internet Service Provider (ISP). EarthLink provides a

variety of services to its customers, including narrowband access, broadband or high-

speed access, and Web hosting services. For two recent years, EarthLink reported the

following (in thousands):



Chapter 9 Receivables 439

Year Ending

Dec. 31, 2006 Dec. 31, 2005

Net sales $1,301,267 $1,290,072Accounts receivable at end of year 51,054 36,033

Assume that the accounts receivable (in thousands) were $30,733 at January 1, 2005.


2. Compute the days’ sales in receivables at the end of 2006 and 2005.3. What conclusions can be drawn from (1) and (2) regarding EarthLink’s

efficiency in collecting receivables?4. Given the nature of EarthLink’s operations, do you believe EarthLink’s

accounts receivable turnover ratio would be higher or lower than a typical manu-facturing company, such as Boeing or Kellogg Company? Explain.

The accounts receivable turnover ratio will vary across companies, depending on the

nature of the company’s operations. For example, an accounts receivable turnover of

6 for an Internet Service Provider is unacceptable but might be excellent for a manu-

facturer of specialty milling equipment. A list of well-known companies follows.

Alcoa Inc. The Coca-Cola Company KrogerAutoZone, Inc. Delta Air Lines Procter & GambleBarnes & Noble, Inc. The Home Depot Wal-MartCaterpillar IBM Whirlpool Corporation

1. Categorize each of the preceding companies as to whether its turnover ratio is likelyto be above or below 15.

2. Based on (1), identify a characteristic of companies with accounts receivableturnover ratios above 15.

SA 9-6Accounts receivableturnover

Answers to Self-Examination Questions

1. B The estimate of uncollectible accounts,$8,500 (answer C), is the amount of the desiredbalance of Allowance for Doubtful Accounts af-ter adjustment. The amount of the current pro-vision to be made for uncollectible accountsexpense is thus $6,000 (answer B), which is theamount that must be added to the Allowance forDoubtful Accounts credit balance of $2,500 (an-swer A) so that the account will have the desiredbalance of $8,500.

2. B The amount expected to be realized from ac-counts receivable is the balance of AccountsReceivable, $100,000, less the balance ofAllowance for Doubtful Accounts, $7,000, or$93,000 (answer B).

3. C Maturity value is the amount that is due atthe maturity or due date. The maturity value of$10,300 (answer C) is determined as follows:

Face amount of note $10,000Plus interest ($10,000 � 0.12 � 90/360) 300_______Maturity value of note $10,300______________

4. C November 3 is the due date of a $12,000,90-day, 8% note receivable dated August 5 [26days in August (31 days � 5 days) + 30 days inSeptember + 31 days in October + 3 days inNovember].

5. B If a note is dishonored, Accounts Receivableis debited for the maturity value of the note (an-swer B). The maturity value of the note is its facevalue (answer A) plus the accrued interest. Thematurity value of the note less accrued interest(answer C) is equal to the face value of the note.The maturity value of the note plus accrued in-terest (answer D) is incorrect, since the interestwould be added twice.


tnewman

Rectangle

Documents

Chapter 9 Receivables 437