9-1 CHAPTER 9 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Identify and distinguish between the different types of receivables. 1, 2 1 2. Show how accounts receivable are recognized in the accounts. 3 2 1 1, 6, 7, 8 1, 6, 7, 8 3. Describe and use the methods and bases used to value accounts receivable. 4, 5, 6, 7, 8 3, 4, 5, 6, 11 2, 3, 4 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 5, 6 4. Determine the entries to record the disposition of accounts receivable. 9, 10, 11 7 5, 6, 10 8, 9 8, 9 5. Determine the interest on notes receivable. 12 8, 10 7, 8, 9 8, 9 8, 9 6. Show how notes receivable are recognized in the accounts. 13 9, 10 7, 8 8, 9 8, 9 7. Demonstrate how notes receivable are valued. 8, 9 8, 9 8. Determine the entries to record the disposition of notes receivable. 14 10 9 8, 9 8, 9 9. Illustrate the statement presentation of receivables. 15 3, 11 10, 11 7, 9 7, 9 10. Evaluate short-term liquidity. 16, 17 12 12 10 10
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9-1
CHAPTER 9 Accounting for Receivables
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Identify and distinguish between the different types of receivables.
1, 2 1
2. Show how accounts receivable are recognized in the accounts.
3 2 1 1, 6, 7, 8 1, 6, 7, 8
3. Describe and use the methods and bases used to value accounts receivable.
4, 5, 6, 7, 8 3, 4, 5, 6, 11
2, 3, 4 1, 2, 3, 4, 5, 6
1, 2, 3, 4, 5, 6
4. Determine the entries to record the disposition of accounts receivable.
9, 10, 11 7 5, 6, 10 8, 9 8, 9
5. Determine the interest on notes receivable.
12 8, 10 7, 8, 9 8, 9 8, 9
6. Show how notes receivable are recognized in the accounts.
13 9, 10 7, 8 8, 9 8, 9
7. Demonstrate how notes receivable are valued.
8, 9 8, 9
8. Determine the entries to record the disposition of notes receivable.
14 10 9 8, 9 8, 9
9. Illustrate the statement presentation of receivables.
15 3, 11 10, 11 7, 9 7, 9
10. Evaluate short-term liquidity.
16, 17 12 12 10 10
9-2
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Prepare journal entries related to bad debts expense.
Simple 20-30
2A Calculate bad debts amounts using various methods.
Simple 15-25
3A Journalize transactions related to bad debts using ageing schedule.
Moderate 20-30
4A Calculate bad debts and journalize transactions using an ageing schedule.
Moderate 15-25
5A Journalize transactions related to bad debts using percentage of sales.
Moderate 15-25
6A Analyse accounts and prepare journal entries for receivables and bad debts.
Complex 15-25
7A Determine missing amounts related to sales and accounts receivable.
Complex 15-25
8A Prepare entries for various receivables transactions.
Moderate 35-45
9A Prepare entries for various notes receivable transactions. Show balance sheet presentation.
Moderate 35-45
10A Calculate ratios to evaluate short-term liquidity.
Moderate 15-25
1B
Prepare journal entries related to bad debts expense.
Simple 20-30
2B Calculate bad debts amounts using various methods.
Simple 15-25
3B Journalize transactions related to bad debts using ageing schedule.
Moderate 20-30
4B Calculate bad debts and journalize transactions using an ageing schedule.
Moderate 15-25
5B Journalize transactions related to bad debts using percentage of receivables.
Moderate 15-25
6B Analyse accounts and prepare journal entries for receivables and bad debts.
Complex 15-25
7B Determine missing amounts related to sales and accounts receivable.
Complex 15-25
8B Prepare entries for various receivables transactions.
Moderate 35-45
9B Prepare entries for various notes receivable transactions. Show balance sheet presentation.
Moderate 35-45
10B Calculate ratios to evaluate short-term liquidity. Moderate 15-25
9-3
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Identify and
distinguish between the different types of receivables.
Q9-2 BE9-1
Q9-1
2. Show how accounts receivable are recognized in the accounts.
Q9-3
BE9-2 E9-1 P9-1A P9-8A P9-1B P9-8B
P9-6A P9-7A P9-6B P9-7B
3. Describe and use the methods and bases used to value accounts receivable.
04. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debts Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues, or to show the net realizable value of the receivables in the balance sheet. The disadvantages are that it may not match expenses with revenue and it does not accurately reflect the collectible value of the accounts receivable on the balance sheet.
5. The essential features of the allowance method of accounting for
bad debts are: (1) Uncollectible accounts receivable are estimated in advance, in
order to match the cost of the bad debts against sales in the same accounting period in which the sale occurred.
(2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time a specific account is written off.0
9-5
Questions Chapter 9 (Continued) 6. Net realizable value is the difference between Accounts Receivable
(normal debit balance) and the Allowance for Doubtful Accounts (normal credit balance). Soo Eng should realize that the decrease in net realizable value occurs when estimated uncollectibles are recognized in an adjusting entry (debit Bad Debt Expense; credit Allowance for Doubtful Accounts). The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, net realizable value does not change.
7. The two bases of estimating uncollectibles under the allowance
method are (1) percentage of sales (income statement method) and (2) percentage of receivables (balance sheet method). The percentage of sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage of receivables basis, the balance in the allowance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to total receivables or (b) from an analysis of individual customer accounts. This method emphasizes net realizable value.
8. The adjusting entry under the percentage of sales basis is:
Bad Debts Expense ..................................................... 4,100 Allowance for Doubtful Accounts ........................ 4,100
The adjusting entry under the percentage of receivables basis is:
Bad Debts Expense ..................................................... 2,300 Allowance for Doubtful Accounts ($5,800 – $3,500) 2,300
9. The first entry is made to reverse write-off of the account receivable. The second entry records the collection of the account.
9-6
Questions Chapter 9 (Continued)
10. The reasons companies sometimes sell their receivables are:
(1) For competitive reasons, sellers often must provide financing to purchasers of their goods for extended periods. Selling receivables provides a more current source of cash to help finance operations.
(2) Receivables may be sold because they may be the only reasonable source of cash readily at hand.
(3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivable to another party who has expertise in billing and collection matters. This will also speed up the collection of cash.
11. By using both its own credit cards, bank credit cards, and debit
cards, Sears provides more options to its customers, increases its revenue, and reduces its risk.
The journal entries for each type of card follow:
Sears card: Dr. Accounts Receivable Cr. Sales Revenue Bank credit card or debit card: Dr. Cash Dr. Credit / Debit Card Expense Cr. Sales Revenue
12. (a) Principal = $12,000 [($360 x 12/4) ÷ 9%] (b) Interest = $5,400 [$30,000 x 6% x 3] (c) Interest rate = 8.33% [($2,500 x 12/6) ÷ $60,000] (d) Time = 3 months [$875 ÷ ($50,000 x 7%) ÷ 12]
9-7
Questions Chapter 9 (Continued) 13. Accounts receivable are amounts owed by customers on account,
resulting from the sale of goods and services in the normal course of business operations (i.e., in trade). Interest is not normally charged on accounts receivable unless they are overdue. Accounts receivable are normally collected within 30 or so days.
Notes receivable represent claims that are evidenced by formal instruments of credit. A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. Interest is normally charged on notes receivable for the entire maturity period. Notes receivable can extend for any period of time, from 30 days to a number of years.
15. Each of the major types of receivables should be identified in the
balance sheet or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts / notes should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately below temporary investments.
16. An increase in the current ratio normally indicates an improvement in
short-term liquidity. This may not always be the case because the composition of current assets may vary. In order to determine if the increase is an improvement in financial health, other ratios that should be considered include: Receivable turnover and collection period and inventory turnover and days sales in inventory ratios.
9-8
Questions Chapter 9 (Continued) 17. Receivables turnover = Net credit sales ÷ Average accounts receivable Net credit sales = Receivables turnover x Average accounts receivable Net credit sales = 8.0583 x $4,542,500 Net credit sales = $36,604,828
9-9
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) Other receivables (b) Notes receivable (c) Accounts receivable BRIEF EXERCISE 9-2 July 1 Accounts Receivable ................................................. 14,000
Sales .................................................................... 14,000 8 Sales Returns and Allowances ................................. 3,800
Accounts receivable Allowance for doubtful accounts Net realizable value
$700,000 0054,000 $646,000
$693,000 0047,000 $646,000
BRIEF EXERCISE 9-6 March 4 Accounts Receivable .............................................. 7,000
Allowance for Doubtful Accounts................... 7,000 Cash ......................................................................... 7,000
Accounts Receivable ....................................... 7,000 BRIEF EXERCISE 9-7 Bank credit card: July 27 Cash ($75 – $2.62) ................................................... 72.38 Credit Card Expense ($75 X 3.5%) ......................... 2.62 Sales.................................................................. 75.00 (a) Debit card: The above entry would not change unless the fee is different, except
that the account used to record the fee is called Debit Card Expense. (b) Nonbank card: July 27 Accounts Receivable ($75 – $2.62)........................ 72.38 Credit Card Expense ($75 X 3.5%) ......................... 2.62 Sales.................................................................. 75.00
9-11
BRIEF EXERCISE 9-8 (a) Total Interest = $15,000 [$900,000 x 10% x 2/12] (b) Interest Rate = 8% [($526.67 x 12) ÷ $79,000] (c) Principal = $56,000 [($1,680 x 12/6) ÷ 6%]
May 3 Cash .............................................................. 700.00 Accounts Receivable—Zachos ........... 700.00
June 1 Accounts Receivable—Zachos................... 14.40
Interest Revenue .................................. 14.40 [28.8% X ($1,300 – $700) x 1/12 ]
EXERCISE 9-6 One possible reason CN sold its receivables may have been to provide it with a source of current financing. Other possible reasons include not wanting to deal with the administration of collecting accounts, the desire to accelerate cash receipts, or to improve its financial ratios (e.g., receivables turnover).
Morgan: $18,000 X 10% X 2/12 ...................................... $300 Wright: $3,600 X 6% X 1/12 ........................................... 18 Barnes: $4,000 X 8% X 0.5/12 ....................................... 13
Total accrued interest ............................................... $331 EXERCISE 9-8 2002 May 1 Notes Receivable–Jones ...................................... 10,500
15 Accounts Receivable ($3,000 X 18% x 1/12) ... 45 Interest Revenue ....................................... 45
(b) Interest Revenue is reported under other revenues and gains. The Credit Card Expense and Debit Card Expense accounts are usually categorized as selling expenses.
9-18
EXERCISE 9-11
DROST COMPANY Balance Sheet (Partial)
October 31, 2003 (In millions)
Assets
Current assets Accounts receivable....................................... $2,907 Less: Allowance for doubtful accounts........ 31 $2,876 Advances to employees ................................. 5 Notes receivable ............................................. 228 HST recoverable ............................................. 25
Total current assets .............................. $3,134 EXERCISE 9-12 Nike Receivables Turnover $8,995.1 ÷ $1,569.4 = 5.73 times 365 days ÷ 5.73 = 63.7 days Reebok $2,899.9 ÷ $417.4 = 6.95 times 365 days ÷ 6.95 = 52.5 days Nike’s receivable turnover and collection period are not as good as Reebok’s or the industry average. Reebok’s ratios are slightly better than the industry average.
March 31 Bad Debts Expense..................................... 120,000 Allowance for Doubtful Accounts....... 120,000
9-21
PROBLEM 9-2A
(a) $38,000 (b) $63,000 ($2,100,000 X 3%) The balance in the Allowance for Doubtful Accounts is irrelevant. (c) $47,400 [($840,000 X 6%) – $3,000] (d) $53,400 [($840,000 X 6%) + $3,000] (e) The weaknesses of the direct write-off method are two-fold. First, it
does not match expenses with revenues. Second, the accounts receivable are not stated at their estimated net realizable value at the balance sheet date.
9-22
PROBLEM 9-3A
(a) Dec. 31 Bad Debts Expense........................................... 16,050
Allowance for Doubtful Accounts............ 16,050 Estimated bad debts $25,050 Less: Unadjusted balance 9,000 Adjustment required $16,050 (a) and (b) Bad Debts Expense Date
Explanation
Ref.
Debit
Credit
Balance
2002 Dec. 31
Adjusting entry
16,050
16,050
Allowance for Doubtful Accounts Date
Explanation
Ref.
Debit
Credit
Balance
2002 Dec. 31 31 2003 Mar. 1 May 1
Balance Adjusting entry
ƒ
1,000
16,050
00,1,000
09,000 25,050
24,050 25,050
9-23
PROBLEM 9-3A (Continued) (b) 1. Mar. 1 Allowance for Doubtful Accounts ................... 1,000
(e) When an allowance is established, an estimate is made of the accounts receivable or credit sales that will not be collected. An entry is made to record this estimate in the period in which the sale occurred. This matches the estimated expense with the revenue it generated.
9-25
PROBLEM 9-5A
(a) Bad Debts Expense (3% X $1,000,000)....................... 30,000
Allowance for Doubtful Accounts....................... 30,000 (b) Allowance for Doubtful Accounts .............................. 37,000
(e) When the percentage of sales (income statement) method is used to
estimate bad debts, recoveries of accounts previously written off do not directly affect the bad debts expense (They may have an indirect effect, by influencing the estimator’s judgment regarding the appropriate percentage of sales to use).
If the percentage of receivables (balance sheet) method of providing for bad debts was used, the recovery would have a direct effect by increasing the balance is the allowance account and therefore reducing the expense to be recorded in the year-end adjustment.
(a) Merchandise inventory at beginning of year ........................ $36,000 Add: Purchases ...................................................................... 60,000 Goods available for sale ......................................................... 96,000 Less: Merchandise inventory at end of year......................... 32,000 Cost of goods sold .................................................................. 64,000 Add: Gross profit..................................................................... 27,000 Total sales................................................................................ 91,000 Less: Cash sales .................................................................... 15,000 Credit sales .............................................................................. $76,000 (b) Accounts receivable at beginning of year ............................ $24,000 Add: Credit sales.................................................................... 76,000 100,000 Less: Accounts collected during the year ............ $61,000 Accounts written off during the year .......... 1,000 62,000 Accounts receivable at end of year ....................................... $38,000
Note that the interest previously accrued on this note should be written off, as well as the note itself. Also, no interest would be accrued for October.
9-32
PROBLEM 9-10A
(a)
2000 1999 Current ratio
$1,125 ÷ $1,903 = 0.6:1
$1,527 ÷ $1,777 = 0.9:1
Acid test ratio
$756 ÷ $1,903 = 0.4:1
$1,110 ÷ $1,777 = 0.6:1
(b)
2000 1999 Receivables turnover
$5,446 ÷ $770 = 7.1x
$5,261 ÷ $603.5 = 8.7x
Collection period
365 days ÷ 7.1 = 51.4 days
365 days ÷ 8.7 = 42.0 days
(c) CN’s short-term liquidity has deteriorated. The current and acid test
ratios both declined. The receivables turnover is less and the average collection period is longer.
(c) Accounts Receivable Allowance for Doubtful Accounts Bal. 1,000,000
(1) 2,600,000 (5) 25,000
(2) 40,000 (3) 2,300,000 (4) 65,000 (5) 25,000
(4) 65,000 Bal. 60,000 (5) 25,000 51,200
Bal. 1,195,000 Bal. 71,200
9-34
PROBLEM 9-2B (a) $24,000 (b) $45,000 ($1,500,000 X 3%) (c) $27,000 [($600,000 X 5%) – $3,000] (d) $32,000 [($600,000 X 5%) + $2,000] (e) The direct write-off method of reporting bad debts expense is not in
accordance with generally accepted accounting principles because it does not match expenses with the associated revenues. In addition, the accounts receivable are not stated at their net realizable value at the balance sheet date.
(f) The answer will vary depending on which method the student
prefers. Example: Although either method is acceptable, I prefer the percentage of
receivables (ageing) basis because I believe it results in a better estimate. It also may lead to better accounts receivable management because of the focus on the age of individual accounts and evaluation of loss percentages in each age category.
Often, I find it helpful to use both methods together to help check the
reasonableness of the estimate.
9-35
PROBLEM 9-3B (a) Dec. 31 Bad Debts Expense..................................... 18,950 Allowance for Doubtful Accounts ...... 18,950 ($28,950 – $10,000) (b) 1. Mar. 31 Allowance for Doubtful Accounts.............. 800 Accounts Receivable .......................... 800 2. May 31 Accounts Receivable .................................. 800 Allowance for Doubtful Accounts ...... 800 31 Cash.............................................................. 800 Accounts Receivable .......................... 800 Bad Debts Expense Date Explanation Ref. Debit Credit Balance 2002 Dec. 31
Adjusting
18,950
18,950
Allowance for Doubtful Accounts Date Explanation Ref. Debit Credit Balance 2002 Dec. 31 31 2003 Mar. 31 May 31
Balance Adjusting
800
18,950
800
10,000 28,950
28,150 28,950
(c) Dec. 31 Bad Debts Expense.................................. 2,970 Allowance for Doubtful Accounts ... 2,970 ($40,000 - $37,030)
9-36
PROBLEM 9-4B (a) Total estimated bad debts
Number of Days Past Due Total 0-30 31-60 61-90 Over 90 Accounts receivable $375,000 $220,000 $90,000 $40,000 $25,000 % uncollectible 1% 4% 5% 10% Estimated bad debts $10,300 $2,200 $3,600 $2,000 $2,500
(b) Bad Debts Expense ................................................... 20,300 Allowance for Doubtful Accounts ..................... 20,300 [$10,300 + $10,000] (c) Allowance for Doubtful Accounts ............................ 5,000 Accounts Receivable.......................................... 5,000 (d) Accounts Receivable................................................. 5,000 Allowance for Doubtful Accounts ..................... 5,000 Cash ........................................................................... 5,000 Accounts Receivable.......................................... 5,000 (e) If Image.com used 3% of accounts receivable rather than ageing the
accounts the allowance at year-end, the adjustment would be $21,250 [($375,000 x 3%) + $10,000]. The remaining entries would remain unchanged.
(f) Ageing the accounts rather than applying a percentage to the total
accounts receivable should produce a more accurate allowance and bad debt expense when the ageing of the accounts change. It also focuses management attention on the receivables and the loss percentages, which can result in better receivables management.
PROBLEM 9-8B (Continued) Nov. 22 There would probably be no entry made on November 22.
Since financial statements are prepared only at year-end, Dot.com Company would probably wait until December 31 before making a decision regarding whether the note should be written off.
Dec. 31 Interest Receivable ................................................ 400 Interest Revenue............................................. 400 ($12,000 x 10% X 4/12)
The company would evaluate the information available on Young Company and may decide to write off the note and not accrue the interest. If they decide that a write-off is appropriate, the above entry would not be made and the following entry would be made:
Dec. 31 Allowance for Doubtful Notes ............................... 12,000 Notes Receivable ......................................... 12,000 (b) Interest should not be accrued if it is unlikely to be collected. In
addition, consideration would have to be given to whether the note should be written off. At the very least, an allowance should be created with respect to the Young Company note, based upon the estimated probability of collection.
9-43
PROBLEM 9-9B
(a) Don Co. $6,000 X 12% X 2/12 = $120 Jean Co. $4,800 X 11% X 1/12 = 44 Total $164 (b) July 1 Cash ($6,000 + $120) .................................... 6,120 Notes Receivable—Don Co.................. 6,000 Interest Receivable ............................... 120 ($6,000 X 12% X 2/12) 5 Accounts Receivable ................................... 6,200 Sales ...................................................... 6,200 14 Cash ($700 – $21) ......................................... 679 Credit Card Expense ($700 X 3%) ............... 21 Sales ...................................................... 700 16 Accounts Receivable ................................... 415 Interest Revenue................................... 415 31 Accounts Receivable—Jean Co.................. 4,888 Notes Receivable—Jean Co................. 4,800 Interest Receivable ............................... 44 ($4,800 X 11% X 1/12) Interest Revenue................................... 44 ($4,800 X 11% X 1/12) 31 Interest Receivable....................................... 75 ($10,000 X 9% X 1/12) Interest Revenue................................... 75
9-44
PROBLEM 9-9B (Continued) (c) Notes Receivable Date Explanation Ref. Debit Credit Balance July 1 1 31
Balance T 6,000 4,800
20,800 14,800 10,000
Accounts Receivable Date Explanation Ref. Debit Credit Balance July 5 16 31
6,200 415
4,888
6,200 6,615 11,503
Interest Receivable Date Explanation Ref. Debit Credit Balance July 1 1 31 31
Balance Adjusting entry
T
75
120
44
164 44
0 75
(d)
OUELLETTE CO. Balance Sheet (partial)
July 31, 2003
Assets Current assets Notes receivable................................................................ $10,000 Accounts receivable ......................................................... 11,503 Interest receivable............................................................. 75 Total current assets .................................................. $21,578
9-45
PROBLEM 9-9B (Continued) (e) Interest should not be accrued if it is unlikely to be collected. In
addition, consideration would have to be given to whether the note should be written off. At the very least, an allowance should be created with respect to the Jean Company note, based upon the estimated probability of collection.
9-46
PROBLEM 9-10B
(a)
2000 1999 Current ratio
$782,878 ÷ $899,684 = 0.9:1
$1,133,906 ÷ $1,874,643 = 0.6:1
Acid test
$690,612 ÷ $899,684 = 0.8:1
$1,048,279 ÷ $1,874,643 = 0.6:1
(b)
2000 1999 Receivables turnover
$4,210,313 ÷ $858,257 = 4.9 x
$4,160,167 ÷ $675,706 = 6.2 x
Collection period
365 days ÷ 4.9 = 74.4 days
365 days ÷ 6.2 = 58.9 days
(c) Becker Milk’s short-term liquidity has improved slightly. The current
and acid test ratios both increased. However, the receivables turnover is lower and the collection period is longer. This could be the reason the current and acid test ratios look ‘artificially’ better. Further investigation is warranted before one should conclude on Becker Milk’s liquidity.
9-47
BYP 9-1 FINANCIAL REPORTING PROBLEM
(a) ($ in thousands) 2000 1999 Acid test ratio
$1,446 + $2,294 = 0.6:1 $6,405
$20,942 + $2,494 = 3.6:1 $6,451
Receivables turnover
$20,844 [$2,294 + $2,494) ÷ 2] = 8.7 x
$21,465 [($2,494 + $7,196) ÷ 2] = 4.4 x
Collection period
365 days = 41.9 days 8.7
365 days = 82.9 days 4.4
(b) The acid test ratio decreased significantly from 1999 to 2000. The
receivables turnover increased substantially, and the average collection period decreased correspondingly, from 1999 to 2000.
9-48
BYP 9-2 INTERPRETING FINANCIAL STATEMENTS
(a)
($ in thousands) 1999 1998 Current ratio
$95,746 ÷ $56,862 = 1.7:1
$113,797 ÷ $71,817 = 1.6:1
Acid test ratio
$37,429 ÷ $56,862 = 0.7:1
$31,135 ÷ $71,817 = 0.4:1
(b)
($ in thousands) 1999 1998 Receivables turnover
$302,392 [$29,955 + $30,776) ÷ 2] = 9.9 x
$291,655 [$30,776 + $23,379) ÷ 2] = 10.8 x
Collection period
365 days ÷ 9.9 = 36.9 days
365 days ÷ 10.8 = 33.8 days
(c) High Liner Foods does an adequate job of managing its receivables.
However, it appears the management’s performance has deteriorated in 1999 compared to the previous year. Its average collection period of 34 days in 1998 and 37 days in 1999 is longer than its credit terms of 7 to 30 days.
(d) The same allowance for doubtful accounts appears reasonable. If there
was a significant difference in credit risk in the separate locations, this should have been disclosed in the notes to the financial statements.
9-49
BYP 9-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page [www.wiley.com/canada/weygandt2].
9-50
BYP 9-4 COLLABORATIVE LEARNING ACTIVITY
(a)
2003
2002
2001
Net credit sales ...................................... Credit and collection expenses
Collection agency fees.......................Salary of accounts receivable clerk..Uncollectible accounts (1.6%) ...........Billing and mailing costs (0.5%)........Credit investigation fees (0.15%) ......
Total .............................................. Total expenses as a percentage of net credit sales....................................
$500,000
$ 02,450 3,800 8,000 2,500
750 $ 17,500
3.5%
$600,000
$ 02,500 3,800 9,600 3,000
0 900 $ 19,800
3.3%
$400,000
$ 2,400 3,800 6,400 2,000
0 ,600 $ 15,200
3.8% (b)
Average accounts receivable (5%)....... Investment income (8%)........................ Total credit and collection expenses per above.............................................Add: Investment income*.....................Net credit and collection expense........ Net expenses as a percentage of net credit sales....................................
$25,000
$ 2,000
$17,500 0002,000
$19,500
3.9%
$30,000
$ 2,400
$19,800 2,400 $22,200
3.7%
$20,000
$ 1,600
$15,200 0 1,600 $16,800
4.2%
* The lost investment income on the cash tied up in accounts receivable is an additional expense of continuing the existing credit policies (an opportunity cost).
9-51
BYP 9-4 (Continued) (c) The analysis shows that the credit card fee of 3% of net credit sales
will be lower than the percentage cost of credit and collection expenses in each year. This is true both before and after considering the effect of income from other investment opportunities. It would be cheaper for Campus Fashions to accept bank credit cards rather than only their own credit card.
However, the decision hinges on (1) the accuracy of the estimate of investment income, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Non-financial factors include the effects on customer relationships of the alternative credit policies, and whether the Berkvoms want to continue with the problems of handling their own accounts receivable. Note that the case mentions that the company has lost some sales as a result of its refusal to accept credit cards. If credit cards are accepted, the extra sales will generate extra profits; operating expenses might also be affected. These should be estimated and taken into consideration as well.
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BYP 9-5 COMMUNICATION ACTIVITY
Dear Lois, The methods you asked about are methods of dealing with uncollectible accounts receivables. Allowance versus direct write-off methods:
The allowance method estimates uncollectible amounts and matches the estimated bad debts expense against revenues generated in the year of the sale. Estimated uncollectible accounts are recorded in a contra account to accounts receivable, called Allowance for Doubtful Accounts. The direct write-off method does not estimate bad debts expenses in advance and an allowance account is not used. Instead, when an account is determined to be uncollectible, it is written off directly to expense. Unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes.
Allowance method—Percentage of sales and percentage of receivables methods:
The percentage of sales and percentage of receivables methods are both acceptable methods used to estimate the amount uncollectible under the “allowance" method. Under the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This is based on past experience and anticipated credit policy. The percentage is then applied to either total credit sales or net credit sales of the current year. This basis of estimating empha-sizes the matching of expenses with revenues, and is therefore deemed an “income statement” approach.
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BYP 9-5 (Continued) Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. This percentage can be applied to total accounts receivable or to aged classes of receivables in which customer accounts are classified by the length of time they have been unpaid. This basis emphasizes net realizable value of receivables and is therefore deemed a "balance sheet" approach.
I hope that this answers your questions. Please do not hesitate to contact me if you require any further information. Sincerely,
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BYP 9-6 ETHICS CASE
(a) The stakeholders in this situation are:
The president of Shirt Co. The controller of Shirt Co. The parent company, Clothes Corp. Any other parties who rely upon the company’s financial
statements. (b) Yes. The controller is posed with an ethical dilemma—should he/she
follow the president's “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement.
(c) Shirt Co.'s growth rate should be a product of fair and accurate
financial statements. One should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of “creative accounting”.