Solution manual accounting 25th editon warren chapter 09

CHAPTER 9
RECEIVABLES
DISCUSSION QUESTIONS
1.

Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or
(3) other receivables.

2.

Dan’s Hardware should use the direct write-off method because it is a small business that has
a relatively small number and volume of accounts receivable.

3.

Contra asset, credit balance

4.

The accounts receivable and allowance for doubtful accounts may be reported at a net amount
of $661,500 ($673,400 – $11,900) in the Current Assets section of the balance sheet. In this
case, the amount of the allowance for doubtful accounts should be shown separately in a note
to the financial statements or in parentheses on the balance sheet. Alternatively, the accounts
receivable may be shown at the gross amount of $673,400 less the amount of the allowance
for doubtful accounts of $11,900, thus yielding net accounts receivable of
$661,500.

5.

(1) The percentage rate used is excessive in relationship to the accounts written off as
uncollectible; hence, the balance in the allowance is excessive.

(2) A substantial volume of old uncollectible accounts is still being carried in the accounts
receivable account.

6.

An estimate based on analysis of receivables provides the most accurate estimate of the
current net realizable value.

7.

a.
b.

8.

The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from
the date it was created. The usual practice is to state the interest rate in terms of an annual
rate, rather than in terms of the period covered by the note.

9.

Debit Accounts Receivable for $243,600
Credit Notes Receivable for $240,000
Credit Interest Revenue for $3,600

10.

Sailfish Company
Notes Receivable

Cash
Accounts Receivable [$240,000 + ($240,000 × 6% × 90/360)]
Interest Revenue
($243,600 × 30/360 × 9% = $1,827).

245,427
243,600
1,827

9-1
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CHAPTER 9

Receivables

PRACTICE EXERCISES
PE 9–1A
Feb.

May

12 Cash
Bad Debt Expense
Accounts Receivable—Leo Jorgenson

800
2,400
3,200

3 Accounts Receivable—Leo Jorgenson
Bad Debt Expense

2,400

3 Cash
Accounts Receivable—Leo Jorgenson

2,400

2 Cash
Bad Debt Expense
Accounts Receivable—Rachel Elpel

600
1,350

2,400

2,400

PE 9–1B
Oct.

Dec.

1,950

20 Accounts Receivable—Rachel Elpel

Bad Debt Expense

1,350

20 Cash
Accounts Receivable—Rachel Elpel

1,350

12 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Leo Jorgenson

800
2,400

1,350

1,350

PE 9–2A
Feb.

May

3,200

3 Accounts Receivable—Leo Jorgenson
Allowance for Doubtful Accounts

2,400

3 Cash
Accounts Receivable—Leo Jorgenson

2,400

2,400

2,400


PE 9–2B
Oct.

2 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Rachel Elpel

Dec.

600
1,350
1,950

20 Accounts Receivable—Rachel Elpel
Allowance for Doubtful Accounts

1,350

20 Cash
Accounts Receivable—Rachel Elpel

1,350

1,350

1,350

PE 9–3A
a.

$55,500 ($7,400,000 × 0.0075)
Adjusted Balance

b.

c.

Accounts Receivable……………………………………………………
Allowance for Doubtful Accounts ($9,000 + $55,500)……………
Bad Debt Expense………………………………………………………

$685,000
64,500
55,500

Net realizable value ($685,000 – $64,500)…………………………

$620,500

PE 9–3B
a.
b.

$231,500 ($46,300,000 × 0.0050)
Adjusted Balance


c.

Accounts Receivable……………………………………………………
Allowance for Doubtful Accounts ($231,500 – $12,500)…………
Bad Debt Expense………………………………………………………

$3,460,000
219,000
231,500

Net realizable value ($3,460,000 – $219,000)………………………

$3,241,000


PE 9–4A
a.

$41,000 ($50,000 – $9,000)
Adjusted Balance

b.

c.

Accounts Receivable…………………………………………………
Allowance for Doubtful Accounts…………………………………
Bad Debt Expense………………………………………………………

$685,000
50,000
41,000

Net realizable value ($685,000 – $50,000)…………………………

$635,000

PE 9–4B
a.

$257,500 ($245,000 + $12,500)
Adjusted Balance

b.

c.

Accounts Receivable…………………………………………………
Allowance for Doubtful Accounts…………………………………
Bad Debt Expense………………………………………………………

$3,460,000
245,000
257,500

Net realizable value ($3,460,000 – $245,000)……………………

$3,215,000

PE 9–5A
a. The due date for the note is September 6, determined as follows:
August …………………………………………………………….……
September………………………………………………………………
Total………………………………………………………………………
b.

24 days (31 – 7)
6 days
30 days

$210,875 [$210,000 + ($210,000 × 5% × 30/360)]

Sept.
c.

6 Cash
Notes Receivable
Interest Revenue

210,875
210,000

875


PE 9–5B
a.

The due date for the note is August 7, determined as follows:
April……………………………………………………………………
May…………………………………………………………………….
June……………………………………………………………………
July…………………………………………………………………….
August………………………………………………………….………
Total……………………………………………………………………

b.

$462,000 [$450,000 + ($450,000 × 8% × 120/360)]

c.

Aug.

7 Cash
Notes Receivable
Interest Revenue

21 days (30 – 9)
31 days
30 days
31 days

7 days
120 days

462,000
450,000
12,000

PE 9–6A
a.

Accounts Receivable Turnover
Net sales……………………………
Accounts receivable:
Beginning of year………………
End of year………………………
Average accts. receivable…………
Accts. receivable turnover………

b.

Number of Days’ Sales
in Receivables
Net sales………………………………
Average daily sales…………………
Average accts. receivable…………
Number of days’ sales in
receivables…………………………

c.

2014
$2,912,000

2013
$2,958,000

$ 300,000
$ 340,000
$ 320,000

$ 280,000
$ 300,000
$ 290,000

[($300,000 + $340,000) ÷ 2]

[($280,000 + $300,000) ÷ 2]

9.1

10.2

($2,912,000 ÷ $320,000)

($2,958,000 ÷ $290,000)

2014
$2,912,000
$ 7,978.1

2013
$2,958,000
$ 8,104.1

($2,912,000 ÷ 365 days)

($2,958,000 ÷ 365 days)

$ 320,000

$ 290,000

[($300,000 + $340,000) ÷ 2]

[($280,000 + $300,000) ÷ 2]

40.1 days

35.8 days

($320,000 ÷ $7,978.1)

($290,000 ÷ $8,104.1)

The decrease in the accounts receivable turnover from 10.2 to 9.1 and the
increase in the number of days’ sales in receivables from 35.8 days to 40.1
days indicate unfavorable trends in the efficiency of collecting receivables.


PE 9–6B

a.

Accounts Receivable Turnover
Net sales…………………………………
Accounts receivable:
Beginning of year…………………
End of year…………………………
Average accts. receivable……………
Accts. receivable turnover……………

b.

Number of Days’ Sales
in Receivables
Net sales…………………………………
Average daily sales……………………
Average accts. receivable……………
Number of days’ sales in
receivables……………………………

c.

2014
$7,906,000

2013
$6,726,000

$ 600,000
$ 580,000

$ 590,000

$ 540,000
$ 600,000
$ 570,000

[($600,000 + $580,000) ÷ 2]

[($540,000 + $600,000) ÷ 2]

13.4

11.8

($7,906,000 ÷ $590,000)

($6,726,000 ÷ $570,000)

2014
$7,906,000
$ 21,660.3

2013
$6,726,000
$ 18,427.4

($7,906,000 ÷ 365 days)

($6,726,000 ÷ 365 days)

$ 590,000

$ 570,000

[($600,000 + $580,000) ÷ 2]

[($540,000 + $600,000) ÷ 2]

27.2 days

30.9 days

($590,000 ÷ $21,660.3)

($570,000 ÷ $18,427.4)

The increase in the accounts receivable turnover from 11.8 to 13.4 and the
decrease in the number of days’ sales in receivables from 30.9 days to 27.2
days indicate favorable trends in the efficiency of collecting receivables.


EXERCISES
Ex. 9–1
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 its 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. 9–2
a.

MGM Resorts International: 22.6% ($93,760,000 ÷ $415,654,000)

b.

Johnson & Johnson: 3.4% ($340,000,000 ÷ $10,114,000,000)

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. 9–3
Jan.

June

Nov.

30 Accounts Receivable—Dr. Cindy Mott
Sales

85,000

30 Cost of Merchandise Sold
Merchandise Inventory

50,000

3 Cash
Bad Debt Expense
Accounts Receivable—Dr. Cindy Mott

85,000

50,000
48,000
37,000
85,000

27 Accounts Receivable—Dr. Cindy Mott
Bad Debt Expense

37,000

27 Cash
Accounts Receivable—Dr. Cindy Mott

37,000

37,000

37,000

Ex. 9–4
Mar.

Aug.

Dec.

19 Accounts Receivable—Midnight Delights Co.
Sales

37,500

19 Cost of Merchandise Sold
Merchandise Inventory

23,000

31 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Midnight Delights Co.

22,000
15,500

22 Accounts Receivable—Midnight Delights Co.
Allowance for Doubtful Accounts

15,500

22 Cash
Accounts Receivable—Midnight Delights Co.

15,500

37,500

23,000

37,500

15,500

15,500

Ex. 9–5
a.

b.

Bad Debt Expense
Accounts Receivable—Wil Treadwell

11,750

Allowance for Doubtful Accounts
Accounts Receivable—Wil Treadwell

11,750

11,750

11,750

Ex. 9–6
a.
b.

$501,000 ($66,800,000 × 0.0075)
$493,000 ($475,000 + $18,000)

c.
d.

$334,000 ($66,800,000 × 0.0050)
$350,000 ($360,000 – $10,000)

Ex. 9–7
Account

Avalanche Auto
Bales Auto
Derby Auto Repair
Lucky’s Auto Repair
Pit Stop Auto
Reliable Auto Repair
Trident Auto
Valley Repair & Tow

Due Date

August 8
October 11
June 23
September 2
September 19
July 15
August 24
May 17

Number of Days Past Due

84 (23 + 30 + 31)
20 (31 – 11)
130 (7 + 31 + 31 + 30 + 31)
59 (28 + 31)
42 (11 + 31)
108 (16 + 31 + 30 + 31)
68 (7 + 30 + 31)
167 (14 + 30 + 31 + 31 + 30 + 31)


Ex. 9–8
a.
Customer

Color World Industries
Hawks Company
Osler Inc.
Sather Sales Company

Wisdom Company

Number of Days Past Due

Due Date

March 13
June 29
July 8
September 6
August 25

171 days (18 + 30 + 31 + 30 + 31 + 31)
63 days (1 + 31 + 31)
54 days (23 + 31)
Not past due
6 days (31 – 25)

b.
Aging of Receivables Schedule
August 31
Days Past Due

Not Past
Customer

Balance

Allied Industries Inc.

3,000

Archer Company

4,500

Zussman Company

5,000

Subtotals
Color World Industries

750,000

Due

1–30

31–60

61–90

90

3,000
4,500

5,000
480,000

160,000

75,000

28,000

33,000

7,000
33,000

Hawks Company

15,000

Osler Inc.
Sather Sales Company
Wisdom Company

21,000
8,000
6,500

8,000

833,500

488,000

Totals

Over

15,000
21,000
6,500
166,500

96,000

43,000

40,000

Ex. 9–9
Days Past Due

Not Past
Balance
Total receivables

833,500

Percentage uncollectible

Due

Over
1–30

488,000

2%

31–60

166,500

6%

96,000

12%

61–90
43,000

30%

90
40,000

75%

Allowance for doubtful
accounts

74,170

9,760

9,990

11,520

12,900

30,000


Ex. 9–10
Aug.

31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($74,170 – $6,350).

67,820
67,820

Ex. 9–11
Estimated
Uncollectible Accounts
Age Interval

Not past due
1–30 days past due
31–60 days past due

61–90 days past due
91–180 days past due
Over 180 days past due
Total

Balance

$ 740,000
390,000
85,000
28,000
42,000
15,000
$1,300,000

Percent

0.5%
2%
4%
14%
32%
80%

Amount

$ 3,700
7,800
3,400
3,920

13,440
12,000
$44,260

Ex. 9–12
2014
Dec.

31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($44,260 + $3,375).

47,635
47,635


Ex. 9–13
a.

Apr.

May

July

Dec.

13 Bad Debt Expense
Accounts Receivable—Dean Sheppard

8,450

15 Cash
Bad Debt Expense
Accounts Receivable—Dan Pyle

500
6,600

27 Accounts Receivable—Dean Sheppard
Bad Debt Expense

8,450

27 Cash
Accounts Receivable—Dean Sheppard

8,450

31 Bad Debt Expense
Accounts Receivable—Paul Chapman
Accounts Receivable—Duane DeRosa
Accounts Receivable—Teresa Galloway
Accounts Receivable—Ernie Klatt
Accounts Receivable—Marty Richey

13,510

31 No entry

8,450

7,100

8,450

8,450

2,225
3,550
4,770
1,275
1,690


Ex. 9–13 (Concluded)
b.

Apr.

May

July

Dec.

c.

13 Allowance for Doubtful Accounts

Accounts Receivable—Dean Sheppard

8,450

15 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Dan Pyle

500
6,600

27 Accounts Receivable—Dean Sheppard
Allowance for Doubtful Accounts

8,450

27 Cash
Accounts Receivable—Dean Sheppard

8,450

31 Allowance for Doubtful Accounts
Accounts Receivable—Paul Chapman
Accounts Receivable—Duane DeRosa
Accounts Receivable—Teresa Galloway
Accounts Receivable—Ernie Klatt
Accounts Receivable—Marty Richey

13,510

31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($3,778,000 × 0.75% = $28,335).

28,335

8,450

7,100

8,450

8,450

2,225
3,550
4,770
1,275
1,690

28,335

Bad debt expense under:
Allowance method………………………...………………………………………
Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)……………
Difference ($28,335 – $20,110)…………………………………………………
Shipway Company’s income would be $8,225 higher under the direct write-off
method than under the allowance method.

$28,335
20,110
$ 8,225


Ex. 9–14
a.

June

Aug.

Oct.

Dec.

8 Bad Debt Expense
Accounts Receivable—Kathy Quantel

8,440

14 Cash
Bad Debt Expense
Accounts Receivable—Rosalie Oakes

3,000
9,500

16 Accounts Receivable—Kathy Quantel
Bad Debt Expense

8,440

16 Cash
Accounts Receivable—Kathy Quantel

8,440

31 Bad Debt Expense
Accounts Receivable—Wade Dolan
Accounts Receivable—Greg Gagne
Accounts Receivable—Amber Kisko
Accounts Receivable—Shannon Poole
Accounts Receivable—Niki Spence

24,955

31 No entry

8,440

12,500

8,440

8,440

4,600
3,600
7,150

2,975
6,630


Ex. 9–14 (Continued)
b.

June

Aug.

Oct.

Dec.

8 Allowance for Doubtful Accounts
Accounts Receivable—Kathy Quantel

8,440

14 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Rosalie Oakes

3,000
9,500

16 Accounts Receivable—Kathy Quantel
Allowance for Doubtful Accounts

8,440

16 Cash
Accounts Receivable—Kathy Quantel

8,440

31 Allowance for Doubtful Accounts
Accounts Receivable—Wade Dolan
Accounts Receivable—Greg Gagne
Accounts Receivable—Amber Kisko
Accounts Receivable—Shannon Poole
Accounts Receivable—Niki Spence

24,955

31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($47,090 – $1,545).

45,545

8,440

12,500

8,440

8,440

4,600
3,600
7,150
2,975
6,630

45,545

Computations:
Aging Class
(Number of Days
Past Due)
0–30 days
31–60 days
61–90 days
91–120 days

More than 120 days
Total receivables

Receivables
Balance on
December 31

$320,000
110,000
24,000
18,000
43,000

$515,000

Estimated Doubtful
Accounts
Percent

1%
3%
10%
33%
75%

Amount

$ 3,200
3,300
2,400
5,940
32,250
$47,090

Estimated balance of allowance account from aging schedule……………………
Unadjusted credit balance of allowance account*……………………………………
Adjustment…………………………………………………………………………………
* $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545

$47,090
1,545
$45,545

Ex. 9–14 (Concluded)
c.

Bad debt expense under:
Allowance method…………………………………………………………………
Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)……………
Difference…………………………………………………………………………

$45,545
34,455
$11,090

Rustic Tables’ income would be $11,090 higher under the direct write-off method
than under the allowance method.

Ex. 9–15
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]

Ex. 9–16
a.

$593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]

b.

$11,700 ($32,500 – $27,800) + ($41,000 – $34,000)

Ex. 9–17
a.

b.

c.

Bad Debt Expense
Accounts Receivable—Shawn Brooke
Accounts Receivable—Eve Denton
Accounts Receivable—Art Malloy
Accounts Receivable—Cassie Yost

30,000

Allowance for Doubtful Accounts
Accounts Receivable—Shawn Brooke
Accounts Receivable—Eve Denton
Accounts Receivable—Art Malloy
Accounts Receivable—Cassie Yost

30,000

Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($5,250,000 × 0.75% = $39,375).

39,375

4,650
5,180

11,050
9,120

4,650
5,180
11,050
9,120

Net income would have been $9,375 higher in 2014 under the direct write-off
method, because bad debt expense would have been $9,375 higher under
the allowance method ($39,375 expense under the allowance method vs.
$30,000 expense under the direct write-off method).

39,375


Ex. 9–18
a.

b.

Bad Debt Expense
Accounts Receivable—Kim Abel
Accounts Receivable—Lee Drake
Accounts Receivable—Jenny Green
Accounts Receivable—Mike Lamb

102,500

Allowance for Doubtful Accounts

Accounts Receivable—Kim Abel
Accounts Receivable—Lee Drake
Accounts Receivable—Jenny Green
Accounts Receivable—Mike Lamb

102,500

Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($109,650 + $7,500).

117,150

21,550
33,925
27,565
19,460

21,550
33,925
27,565
19,460

117,150

Computations:
Aging Class

Receivables

(Number of Days

Balance on

Past Due)

December 31

More than 120 days

$ 715,000
310,000
102,000
76,000
97,000

Total receivables

$1,300,000

0–30 days
31–60 days
61–90 days

91–120 days

Estimated Doubtful

Accounts

Percent

1%
2%
15%
30%
60%

Amount

$

7,150
6,200
15,300
22,800
58,200
$109,650

Unadjusted debit balance of Allowance for Doubtful Accounts
($102,500 – $95,000)………………………………………………………………………
Estimated balance of Allowance for Doubtful Accounts
from aging schedule……………………………………………………………………
Adjustment…………………………………………………………………………………
c.

$

7,500

109,650
$117,150

Net income would have been $14,650 lower in 2014 under the allowance
method, because bad debt expense would have been $14,650 higher under the
allowance method ($117,150 expense under the allowance method versus
$102,500 expense under the direct write-off method).


Ex. 9–19
Due Date

Interest
$1,100

[$55,000 × 0.08 × (90/360)]

May 8

300

[$36,000 × 0.05 × (60/360)]

c.

July 30

390

[$78,000 × 0.04 × (45/360)]

d.

Nov. 3

161

[$13,800 × 0.07 × (60/360)]

e.

Jan. 29

a.

Apr. 22

b.

1,160

[$58,000 × 0.06 × (120/360)]

Ex. 9–20
a.
b.
c.

June 18 (10 + 31 + 30 + 31 + 18)
$153,500 [($150,000 × 7% × 120/360) + $150,000]

(1)

(2)

Notes Receivable
Accounts Rec.—Dry Creek Interior Decorators

150,000

Cash
Notes Receivable
Interest Revenue

153,500

150,000

Ex. 9–21
1.

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.

150,000
3,500


Ex. 9–22
2013
Dec.

2014
Mar.

16 Notes Receivable

Accounts Receivable—Lake Shore
Clothing & Bags Co.

21,000
21,000

31 Interest Receivable
Interest Revenue
Accrued interest
($21,000 × 0.08 × 15/360 = $70).

70

31 Interest Revenue
Income Summary

70

16 Cash
Notes Receivable
Interest Receivable
Interest Revenue
($21,000 × 0.08 × 75/360).

70

70

21,420
21,000

70
350

Ex. 9–23
July

Nov.

Dec.

12 Notes Receivable
Accounts Receivable—Accolade Co.

240,000
240,000

9 Accounts Receivable—Accolade Co.
Notes Receivable
Interest Revenue
($240,000 × 0.07 × 120/360).

245,600

9 Cash
Accounts Receivable—Accolade Co.
Interest Revenue
($245,600 × 0.09 × 30/360).

247,442

240,000
5,600

245,600
1,842


Ex. 9–24
Apr.

May

June

Aug.

Oct.

18 Notes Receivable
Accounts Receivable—Glenn Cross

60,000

30 Notes Receivable
Accounts Receivable—Rhoni Melville

42,000

18 Accounts Receivable—Glenn Cross
Notes Receivable

Interest Revenue
($60,000 × 7% × 30/360).

60,350

29 Accounts Receivable—Rhoni Melville
Notes Receivable
Interest Revenue
($42,000 × 8% × 60/360).

42,560

16 Cash
Accounts Receivable—Glenn Cross
Interest Revenue
($60,350 × 8% × 90/360).

61,557

22 Allowance for Doubtful Accounts
Accounts Receivable—Rhoni Melville

42,560

60,000

42,000

60,000
350

42,000
560

60,350
1,207

42,560

Ex. 9–25
1.

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:
NAPA VINO COMPANY
Balance Sheet
December 31, 2014
Assets

Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for doubtful accounts

Interest receivable

$
$1,200,000
11,500

78,500
300,000

1,188,500
4,500


Ex. 9–26
a. and b.
Net sales……………………………
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
Average daily sales………………
Days’ sales in receivables………

c.

Year 1

$5,660,300

$4,978,900

$592,700
$539,450

$486,200
$531,450

[($592,700 + $486,200) ÷ 2]

[($486,200 + $576,700) ÷ 2]

10.5

9.4

($5,660,300 ÷ $539,450)

($4,978,900 ÷ $531,450)

$15,507.7

$13,640.8

($5,660,300 ÷ 365 days)

($4,978,900 ÷ 365 days)

34.8

39.0

($539,450 ÷ $15,507.7)

($531,450 ÷ $13,640.8)

The accounts receivable turnover indicates an increase in the efficiency of collecting
accounts receivable by increasing from 9.4 to 10.5, a favorable trend. The days’ sales
in receivables also indicates an increase in the efficiency of collecting accounts
receivable by decreasing from 39.0 to 34.8, which is a favorable trend. However,
before reaching a final conclusion, the ratios should be compared with industry
averages and similar firms.

Ex. 9–27
a. and b.
Net sales……………………………
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
Average daily sales………………
Days’ sales in receivables………
c.

Year 2

Year 2

Year 1

$10,706,588
$1,265,032
$1,155,185

$10,494,983
$1,045,338
$1,108,567.5

[($1,265,032 + $1,045,338) ÷ 2]

[($1,045,338 + $1,171,797) ÷ 2]

9.3

9.5

($10,706,588 ÷ $1,155,185)

($10,494,983 ÷ $1,108,567.5)

$29,333.1

$28,753.4

($10,706,588 ÷ 365 days)

($10,494,983 ÷ 365 days)

39.4

38.6

($1,155,185 ÷ $29,333.1)

($1,108,567.5 ÷ $28,753.4)

The accounts receivable turnover indicates a decrease in the efficiency of collecting
accounts receivable by decreasing from 9.5 to 9.3, an unfavorable trend. The number
of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an
unfavorable trend in collections of receivables. These unfavorable trends are
consistent with the economic downturn that occurred worldwide in Year 1 and Year 2.
However, before reaching a final conclusion, both ratios should be compared with
those of past years, industry averages, and similar firms.


Ex. 9–28
a. and b.
Net sales…………………………
Accounts receivable…………
Average accts. receivable……
Accts. receivable turnover……
Average daily sales……………
Days’ sales in receivables……

c.

Year 2

Year 1

$9,613
$ 267

$8,632
$ 249

$ 258

$ 281

[($267 + $249) ÷ 2]

[($249 + $313) ÷ 2]

37.3

30.7

($9,613 ÷ $258)

($8,632 ÷ $281)

$26.3

$23.6

($9,613 ÷ 365 days)

($8,632 ÷ 365 days)

9.8

11.9

($258 ÷ $26.3)

($281 ÷ $23.6)

The accounts receivable turnover indicates an increase in the efficiency of
collecting accounts receivable by increasing from 30.7 to 37.3, a favorable trend.
The days’ sales in receivables indicates an increase in the efficiency of collecting
accounts receivable by decreasing from 11.9 to 9.8, also indicating a favorable
trend. Before reaching a conclusion, however, the ratios should be compared with
industry averages and similar firms.


Ex. 9–29
a.

The average accounts receivable turnover ratios are as follows:
The Limited Brands Inc.: 34.0 [(37.3 + 30.7) ÷ 2]
H.J. Heinz Company: 9.4 [(9.3 + 9.5) ÷ 2]
Note: For computations of the individual ratios, see Ex. 9–27 and Ex. 9–28.

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. Thus, we would
expect Heinz’s average accounts receivable turnover ratio to be lower than
The Limited Brands, as shown in (a).


PROBLEMS
Prob. 9–1A
2.

20—
Feb.

May

Aug.

Oct.

Dec.

8 Cash
Allowance for Doubtful Accounts
Accounts Receivable—DeCoy Co.

7,200
10,800
18,000

27 Accounts Receivable—Seth Nelsen
Allowance for Doubtful Accounts

7,350

27 Cash
Accounts Receivable—Seth Nelsen

7,350

13 Allowance for Doubtful Accounts
Accounts Receivable—Kat Tracks Co.

6,400

31 Accounts Receivable—Crawford Co.
Allowance for Doubtful Accounts

3,880

31 Cash
Accounts Receivable—Crawford Co.

3,880

7,350

7,350

6,400

3,880

3,880

31 Allowance for Doubtful Accounts
Accounts Receivable—Newbauer Co.
Accounts Receivable—Bonneville Co.
Accounts Receivable—Crow Distributors
Accounts Receivable—Fiber Optics

23,200

31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate
($35,700 + $3,170).

38,870

7,190
5,500
9,400
1,110

38,870

Prob. 9–1A (Concluded)
1. and 2.

Allowance for Doubtful Accounts

Feb.
Aug.
Dec.

8
13
31

Dec.

31

10,800
6,400
23,200
Unadjusted Balance

Jan.
May
Oct.

1
27

31

Balance

26,000
7,350
3,880

Dec.

31

Adjusting Entry

38,870

Dec.

31

Adj. Balance

35,700

3,170

Bad Debt Expense
Dec.

31

Adjusting Entry

3.

$1,749,300 ($1,785,000 – $35,700)

4.

a.
b.
c.

38,870

$45,500 ($18,200,000 × 0.0025)
$42,330 ($45,500 – $3,170)
$1,742,670 ($1,785,000 – $42,330)