Chapter Review
9-9fExercises
Classifications of Receivables
OBJ. 1
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Boeing is one of the world’s major aerospace firms with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of a recent year, Boeing had $1,877 million of receivables involving U.S. government contracts and $2,059 million of receivables involving commercial aircraft customers such as Delta Air Lines and United Airlines.
Should Boeing report these receivables separately in the financial statements or combine them into one overall accounts receivable amount? Explain.
Nature of Uncollectible Accounts
OBJ. 2
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MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $747,981,000 and allowance for doubtful accounts of $90,775,000. Johnson & Johnson manufactures and sells a wide range of health care products including Band-Aid® bandages and Tylenol®. As of a recent year, Johnson & Johnson reported accounts receivable of $14,346,000,000 and allowance for doubtful accounts of $248,000,000.
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Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM Resorts International. Round to one decimal place.
AnswerCheck Figure: 12.1%
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Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson & Johnson. Round to one decimal place.
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Discuss possible reasons for the difference in the two ratios computed in (a) and (b).
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Entries for Uncollectible Accounts, Using Direct Write-Off Method
OBJ. 3
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Journalize the following transactions in the accounts of Arrow Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:
Jan. 19. Sold merchandise on account to Dr. Sinclair Welby, $77,000. The cost of the merchandise sold was $52,600. July 7. Received $30,800 from Dr. Sinclair Welby and wrote off the remainder owed on the sale of January 19 as uncollectible. Nov. 2. Reinstated the account of Dr. Sinclair Welby that had been written off on July 7 and received $46,200 cash in full payment.
Entries for Uncollectible Receivables, Using Allowance Method
OBJ. 4
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Journalize the following transactions in the accounts of Arizona Interiors Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:
May 1. Sold merchandise on account to Taiwan Palace Co., $25,800. The cost of the merchandise sold was $15,300. Aug. 30. Received $10,900 from Taiwan Palace Co. and wrote off the remainder owed on the sale of May 1 as uncollectible. Dec. 8. Reinstated the account of Taiwan Palace Co. that had been written off on August 30 and received $14,900 cash in full payment.
Entries to Write Off Accounts Receivable
OBJ. 3, 4
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Capstone Solutions Company, a computer consulting firm, has decided to write off the $45,800 balance of an account owed by a customer, Philadelphia Inc. Journalize the entry to record the write-off, assuming that (a) the direct write-off method is used and (b) the allowance method is used.
Providing for Doubtful Accounts
OBJ. 4
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At the end of the current year, the accounts receivable account has a debit balance of $2,700,000 and sales for the year total $32,400,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:
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The allowance account before adjustment has a debit balance of $27,100. Bad debt expense is estimated at ½ of 1% of sales.
AnswerCheck Figure: $162,000
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The allowance account before adjustment has a debit balance of $27,100. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $128,000.
AnswerCheck Figure: $155,100
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The allowance account before adjustment has a credit balance of $17,900. Bad debt expense is estimated at ¾ of 1% of sales.
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The allowance account before adjustment has a credit balance of $17,900. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $279,000.
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Number of Days Past Due
OBJ. 4
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Toot Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Toot’s credit terms are n/30. As of the end of business on October 31, the following accounts receivable were past due:
Account Due Date Amount Avalanche Auto August 8 $12,000 Bales Auto October 11 2,400 Derby Auto Repair June 23 3,900 Lucky’s Auto Repair September 2 6,600 Pit Stop Auto September 19 1,100 Reliable Auto Repair July 15 9,750 Trident Auto August 24 1,800 Valley Repair & Tow May 17 4,000 Determine the number of days each account is past due as of October 31.
AnswerCheck Figure: Avalanche Auto, 84 days
Aging of Receivables Schedule
OBJ. 4
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The accounts receivable clerk for Kirchhoff Industries prepared the following partially completed aging of receivables schedule as of the end of business on August 31:
The following accounts were unintentionally omitted from the aging schedule and not included in the preceding subtotals:
Customer Balance Due Date Conover Industries $30,000 March 22 Keystone Company 18,000 July 1 Moxie Creek Inc. 9,000 July 25 Rainbow Company 26,400 September 10 Swanson Company 46,600 August 3 -
Determine the number of days past due for each of the preceding accounts as of August 31.
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Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
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Estimating Allowance for Doubtful Accounts
OBJ. 4
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Kirchhoff Industries has a past history of uncollectible accounts, as follows. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule you completed in Exercise 9-8.
Age Class Percent Uncollectible Not past due 2% 1–30 days past due 4 31–60 days past due 18 61–90 days past due 40 Over 90 days past due 75 AnswerCheck Figure: Allowance for doubtful accounts, $131,712
Adjustment for Uncollectible Accounts
OBJ. 4
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Using data in Exercise 9-9, assume that the allowance for doubtful accounts for Kirchhoff Industries has a credit balance of $10,112 before adjustment on August 31. Journalize the adjusting entry for uncollectible accounts as of August 31.
Estimating Doubtful Accounts
OBJ. 4
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Performance Bike Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31 and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:
Estimate the proper balance of the allowance for doubtful accounts as of December 31.
Entry for Uncollectible Accounts
OBJ. 4
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Using the data in Exercise 9-11, assume that the allowance for doubtful accounts for Performance Bike Co. had a debit balance of $28,400 as of December 31.
Journalize the adjusting entry for uncollectible accounts as of December 31.
Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Methods
OBJ. 5
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The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:
Apr.
13.
Wrote off account of Dean Sheppard, $8,450.
May
15.
Received $500 as partial payment on the $7,100 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July
27.
Received $8,450 from Dean Sheppard, whose account had been written off on April 13. Reinstated the account and recorded the cash receipt.
Dec.
31.
Wrote off the following accounts as uncollectible (record as one journal entry):
Paul Chapman
$2,225
Duane DeRosa
3,550
Teresa Galloway
4,770
Ernie Klatt
1,275
Marty Richey
1,690
31.
If necessary, record the year-end adjusting entry for uncollectible accounts.
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Journalize the transactions under the direct write-off method.
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Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during the year.
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How much higher (lower) would Shipway Company’s net income have been under the direct write-off method than under the allowance method?
AnswerCheck Figure: $8,225 higher
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Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Methods
OBJ. 5
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The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:
June 8. Wrote off account of Kathy Quantel, $8,440. Aug. 14. Received $3,000 as partial payment on the $12,500 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible. Oct. 16. Received the $8,440 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt. Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):
Wade Dolan $4,600 Greg Gagne 3,600 Amber Kisko 7,150 Shannon Poole 2,975 Niki Spence 6,630 31. If necessary, record the year-end adjusting entry for uncollectible accounts. -
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Journalize the transactions under the direct write-off method.
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Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $36,000 on January 1 and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:
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How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?
AnswerCheck Figure: $11,090 higher
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Effect of Doubtful Accounts On Net Income
OBJ. 5
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During its first year of operations, Mack’s Plumbing Supply Co. had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.
Effect of Doubtful Accounts On Net Income
OBJ. 5
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Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co. had sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.
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Determine what net income would have been in the second year if the allowance method (using 1% of sales) had been used in both the first and second years.
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Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years. Hint: Use an Allowance for Doubtful Accounts T account.
AnswerCheck Figure: $11,700 credit balance
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Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Methods
OBJ. 5
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Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:
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Journalize the write-offs under the direct write-off method.
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Journalize the write-offs under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded $5,250,000 of credit sales during the year. Based on past history and industry averages, of credit sales are expected to be uncollectible.
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How much higher (lower) would Casebolt Company’s net income have been under the direct write-off method than under the allowance method?
AnswerCheck Figure: $9,375 higher
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Entries for Bad Debt Expense Under the Direct Write-Off and Allowance Methods
OBJ. 5
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Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:
The company prepared the following aging schedule for its accounts receivable on December 31:
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Journalize the write-offs under the direct write-off method.
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Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $95,000 on January 1 and the company uses the analysis of receivables method.
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How much higher (lower) would Seaforth International’s net income have been under the allowance method than under the direct write-off method?
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Determine Due Date and Interest On Notes
OBJ. 6
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Determine the due date and the amount of interest due at maturity on the following notes:
AnswerCheck Figure: Apr. 10, $500
Entries for Notes Receivable
OBJ. 6
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Autumn Designs & Decorators issued a 120-day, 5% note for $93,000, dated April 13 to Zebra Furniture Company on account.
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Determine the due date of the note.
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Determine the maturity value of the note.
AnswerCheck Figure: $94,550
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Journalize the entries to record the following: (1) receipt of the note by Zebra Furniture and (2) receipt of payment of the note at maturity.
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Entries for Notes Receivable
OBJ. 6
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The series of five transactions recorded in the following T accounts were related to a sale to a customer on account and the receipt of the amount owed. Briefly describe each transaction.
Cash Notes Receivable (e) 76,500 (c) 75,000 (d) 75,000 Accounts Receivable Cost of Goods Sold (a) 75,000 (c) 75,000 (b) 45,000 (d) 75,400 (e) 75,400 Inventory Interest Revenue (b) 45,000 (d) 400 (e) 1,100 Sales (a) 75,000
Entries for Notes Receivable, Including Year-End Entries
OBJ. 6
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The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:
20Y3 Nov. 21. Received from McKenna Outer Wear Co., on account, a $96,000, 60-day, 3% note dated November 21 in settlement of a past due account. Dec. 31. Recorded an adjusting entry for accrued interest on the note of November 21. 20Y4 Jan. 20. Received payment of note and interest from McKenna Outer Wear Co. Journalize the entries to record the transactions.
Entries for Receipt and Dishonor of Note Receivable
OBJ. 6
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Journalize the following transactions of Trapper Jon’s Productions:
June 23. Received a $48,000, 90-day, 8% note dated June 23 from Radon Express Co. on account. Sept. 21. The note is dishonored by Radon Express Co. Oct. 21. Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Radon Express Co. on September 21.
Entries for Receipt and Dishonor of Notes Receivable
OBJ. 6
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Journalize the following transactions in the accounts of Safari Games Co., which operates a riverboat casino:
Apr. 18. Received a $60,000, 30-day, 7% note dated April 18 from Glenn Cross on account. 30. Received a $42,000, 60-day, 8% note dated April 30 from Rhoni Melville on account. May 18. The note dated April 18 from Glenn Cross is dishonored, and the customer’s account is charged for the note, including interest. June 29. The note dated April 30 from Rhoni Melville is dishonored, and the customer’s account is charged for the note, including interest. Aug. 16. Cash is received for the amount due on the dishonored note dated April 18 plus interest for 90 days at 8% on the total amount debited to Glenn Cross on May 18. Oct. 22. Wrote off against the allowance account the amount charged to Rhoni Melville on June 29 for the dishonored note dated April 30.
Receivables On the Balance Sheet
OBJ. 7
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List any errors you can find in the following partial balance sheet:
Accounts Receivable Turnover and Days’ Sales in Receivables
OBJ. 8
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Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren, Polo Jeans Co., and Chaps. Polo Ralph Lauren reported the following (in thousands) for two recent years:
For the Period Ending Year 2 Year 1 Sales $6,182,300 $6,652,800 Accounts receivable 643,600 664,600 Assume that accounts receivable (in thousands) were $770,700 at the beginning of Year 1.
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Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
AnswerCheck Figure: Year 2: 9.45
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Compute the days’ sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
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What conclusions can be drawn from these analyses regarding Ralph Lauren’s efficiency in collecting receivables?
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Accounts Receivable Turnover and Days’ Sales in Receivables
OBJ. 8
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The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data (in millions) were reported by Campbell Soup for two recent years:
Year 2 Year 1 Sales $8,685 $7,890 Accounts receivable 805 616 Assume that the accounts receivable were $638 million at the beginning of Year 1.
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Compute the accounts receivable turnover for Year 2 and Year 1. Round average accounts receivable to one decimal place and accounts receivable turnover to two decimal places.
AnswerCheck Figure: Year 2: 12.22
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Compute the days’ sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
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What conclusions can be drawn from these analyses regarding Campbell’s efficiency in collecting receivables?
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Accounts Receivable Turnover and Days’ Sales in Receivables
OBJ. 8
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American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. American Eagle reported the following data (in millions) for two recent years:
Year 2 Year 1 Sales $4,036 $3,796 Accounts receivable 93 78 Assume that accounts receivable were $87 million at the beginning of Year 1.
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Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
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Compute the days’ sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
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What conclusions can be drawn from these analyses regarding American Eagle Outfitters’ efficiency in collecting receivables?
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Accounts Receivable Turnover
OBJ. 8
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Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.
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Compute the average accounts receivable turnover ratio for Campbell Soup and American Eagle for the years shown in Exercises 9-27 and 9-28.
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Does Campbell Soup or American Eagle have the higher average accounts receivable turnover ratio?
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Explain why the average turnover ratios are different in (b).
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