CHAPTER RECEIVABLES DISCUSSION QUESTIONS Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or (3) other receivables 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 Contra asset, credit balance 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 (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 An estimate based on analysis of receivables provides the most accurate estimate of the current net realizable value a b 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 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Receivables PRACTICE EXERCISES PE 9–1A Feb May 12 Cash Bad Debt Expense Accounts Receivable—Leo Jorgenson 800 2,400 3,200 Accounts Receivable—Leo Jorgenson Bad Debt Expense 2,400 Cash Accounts Receivable—Leo Jorgenson 2,400 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 Accounts Receivable—Leo Jorgenson Allowance for Doubtful Accounts 2,400 Cash Accounts Receivable—Leo Jorgenson 2,400 2,400 2,400 PE 9–2B Oct 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) days 30 days $210,875 [$210,000 + ($210,000 × 5% × 30/360)] Sept c 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 Cash Notes Receivable Interest Revenue 21 days (30 – 9) 31 days 30 days 31 days 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 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 October 11 June 23 September 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 September August 25 171 days (18 + 30 + 31 + 30 + 31 + 31) 63 days (1 + 31 + 31) 54 days (23 + 31) Not past due 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 Prob 9–1B 20— Jan Apr July Nov Dec 19 Accounts Receivable—Arlene Gurley Allowance for Doubtful Accounts 2,660 19 Cash Accounts Receivable—Arlene Gurley 2,660 Allowance for Doubtful Accounts Accounts Receivable—Premier GS Co 16 Cash Allowance for Doubtful Accounts Accounts Receivable—Hayden Co 2,660 2,660 12,750 12,750 5,500 16,500 22,000 23 Accounts Receivable—Harry Carr Allowance for Doubtful Accounts 4,000 23 Cash Accounts Receivable—Harry Carr 4,000 4,000 4,000 31 Allowance for Doubtful Accounts Accounts Receivable—Cavey Co Accounts Receivable—Fogle Co Accounts Receivable—Lake Furniture Accounts Receivable—Melinda Shryer 24,000 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate ($60,000 – $3,410) 56,590 3,300 8,100 11,400 1,200 56,590 Prob 9–1B (Concluded) and Apr July Dec Allowance for Doubtful Accounts 16 31 12,750 16,500 24,000 Jan Jan Nov 19 23 Balance Dec 31 Unadjusted Balance Dec 31 Adjusting Entry 56,590 Dec 31 Adjusted Balance 60,000 Bad Debt Expense Dec 31 Adjusting Entry 56,590 $2,290,000 ($2,350,000 – $60,000) a b c $79,000 ($15,800,000 × 0.005) $82,410 ($79,000 + $3,410) $2,267,590 ($2,350,000 – $82,410) 50,000 2,660 4,000 3,410 Prob 9–2B Customer Due Date Number of Days Past Due Arcade Beauty Aug 17, 2013 136 days (14 + 30 + 31 + 30 + 31) Creative Images Oct 30, 2013 62 days (1 + 30 + 31) Excel Hair Products July 3, 2013 First Class Hair Care Sept 8, 2013 181 days (28 + 31 + 30 + 31 + 30 + 31) 114 days (22 + 31 + 30 + 31) Golden Images Nov 23, 2013 Nov 29, 2013 38 days (7 + 31) Dec 7, 2013 24 days Jan 11, 2014 Not past due Oh That Hair One Stop Hair Designs Visions Hair & Nail 32 days (1 + 31) and Aging of Receivables Schedule December 31, 2013 Not Customer Balance ABC Beauty 15,000 Angel Wigs 8,000 Zodiac Beauty Subtotals Arcade Beauty Days Past Due Past Due 1–30 210,000 112,000 55,000 18,000 10,000 7,500 First Class Hair Care 6,600 Golden Images 3,600 3,600 Oh That Hair 1,400 1,400 One Stop Hair Designs 4,000 Visions Hair & Nail 9,000 9,000 925,600 424,000 8,500 7,500 6,600 4,000 1% 123,235 65,000 10,000 8,500 Percentage uncollectible Over 120 3,000 415,000 Excel Hair Products Estimate of uncollectible accounts 91–120 8,000 Creative Images Totals 61–90 15,000 3,000 875,000 31–60 4,240 214,000 4% 8,560 117,000 16% 18,720 63,500 25% 15,875 24,600 40% 9,840 82,500 80% 66,000 Prob 9–2B (Concluded) Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate ($123,235 – $7,375) 115,860 115,860 On the balance sheet, assets would be overstated by $115,860, since the allowance for doubtful accounts would be understated by $115,860 In addition, the owner’s capital account would be overstated by $115,860, since bad debt expense would be understated and net income overstated by $115,860 on the income statement Prob 9–3B Bad Debt Expense Year 1st 2nd 3rd 4th Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense $18,000 30,200 39,900 52,600 $31,250 37,000 45,000 60,000 $13,250 6,800 5,100 7,400 Balance of Allowance Account, End of Year $13,250 20,050 25,150 32,550 Yes The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years on the basis of 1/4% of sales The total write-off of receivables originating in the first year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt expense based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025) For the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025) Prob 9–4B Note Oct Dec (a) (b) Due Date Interest Due at Maturity Feb 13 Apr 23 Oct 10 Nov Jan 14 Feb $110 525 600 200 480 240 ($33,000 ($60,000 ($48,000 ($16,000 ($36,000 × 30/360 × 4%) × 45/360 × 7%) × 90/360 × 5%) × 75/360 × 6%) × 60/360 × 8%) ($24,000 × 60/360 × 6%) 10 Accounts Receivable Notes Receivable 48,000 Interest Revenue 600 31 Interest Receivable Interest Revenue Accrued interest $36,000 × 8% × 46/360 $24,000 × 6% × 21/360 Total Jan 48,600 14 Cash 452 452 = $368 84 $452 36,480 Notes Receivable Feb 36,000 Interest Receivable 368 Interest Revenue ($36,000 × 8% × 14/360) 112 Cash Notes Receivable Interest Receivable Interest Revenue ($24,000 × 6% × 39/360) 24,240 24,000 84 156 Prob 9–5B Mar May June July Aug Dec Notes Receivable Accounts Receivable 33,000 31 Notes Receivable Accounts Receivable 80,000 Cash Notes Receivable Interest Revenue 33,000 80,000 33,275 33,000 275 16 Notes Receivable Accounts Receivable 72,000 11 Notes Receivable Accounts Receivable 36,000 29 Cash Notes Receivable Interest Revenue 81,400 26 Cash Notes Receivable Interest Revenue 36,270 Notes Receivable Accounts Receivable 72,000 36,000 80,000 1,400 36,000 270 48,000 48,000 14 Cash Notes Receivable Interest Revenue 73,260 Cash Notes Receivable Interest Revenue 49,440 72,000 1,260 48,000 1,440 Prob 9–6B 20— Jan Mar May June July Sept 21 Accounts Receivable—Black Tie Co Sales 28,000 21 Cost of Merchandise Sold Merchandise Inventory 16,800 18 Notes Receivable Accounts Receivable—Black Tie Co 28,000 17 Cash Notes Receivable Interest Revenue ($28,000 × 6% × 60/360) 28,280 15 Accounts Receivable—Pioneer Co Sales 17,700 15 Cost of Merchandise Sold Merchandise Inventory 10,600 21 Notes Receivable Cash 18,000 25 Cash Sales Discounts Accounts Receivable—Pioneer Co 17,523 177 21 Notes Receivable Cash Notes Receivable Interest Revenue ($18,000 × 8% × 30/360) 18,000 120 19 Cash Notes Receivable Interest Revenue ($18,000 × 9% × 60/360) 18,270 22 Accounts Receivable—Wycoff Co Sales 20,000 28,000 16,800 28,000 28,000 280 17,700 10,600 18,000 17,700 18,000 120 18,000 270 20,000 Prob 9–6B (Concluded) Sept Oct Nov Dec 22 Cost of Merchandise Sold Merchandise Inventory 12,000 14 Notes Receivable Accounts Receivable—Wycoff Co 20,000 13 Accounts Receivable—Wycoff Co Notes Receivable Interest Revenue ($20,000 × 6% × 30/360) 20,100 28 Cash Accounts Receivable—Wycoff Co Interest Revenue ($20,100 × 8% × 45/360) 20,301 12,000 20,000 20,000 100 20,100 201 CASES & PROJECTS CP 9–1 By computing interest using a 365-day year for depository accounts (liabilities), Bev is minimizing interest expense to the bank By computing interest using a 360-day year for loans (assets), Bev is maximizing interest revenue to the bank However, federal legislation (Truth in Lending Act) requires banks to compute interest on a 365-day year Hence, Bev is behaving in an unprofessional manner CP 9–2 a a Addition to Allowance b Accounts Written Year for Doubtful Accounts Off During Year 2011 2012 2013 2014 $20,000 22,000 24,000 25,500 $15,000 18,750 22,050 21,300 ($20,000 – $5,000) ($5,000 + $22,000 – $8,250) ($8,250 + $24,000 – $10,200) ($10,200 + $25,500 – $14,400) The estimate of 1/2 of 1% of credit sales may be too large, since the allowance for doubtful accounts has steadily increased each year The increasing balance of the allowance for doubtful accounts may also be due to the failure to write off a large number of uncollectible accounts These possibilities could be evaluated by examining the accounts in the accounts receivable subsidiary ledger for collectibility and comparing the result with the balance in the allowance for doubtful accounts Note to Instructors: Since the allowance for doubtful accounts increased by 188% [($14,400 – $5,000) ÷ $5,000], while sales have increased by 27.5% [($5,100,000 – $4,000,000) ÷ $4,000,000], the increase cannot be explained by an expanding volume of sales CP 9–2 (Concluded) b The balance of Allowance for Doubtful Accounts that should exist at December 31, 2014, can only be determined after all attempts have been made to collect the receivables on hand at December 31, 2014 However, the account balances at December 31, 2014, could be analyzed, perhaps using an aging schedule, to determine a reasonable amount of allowance and to determine accounts that should be written off Also, past write-offs of uncollectible accounts could be analyzed in depth in order to develop a reasonable percentage for future adjusting entries, based on past history Caution, however, must be exercised in using historical percentages Specifically, inquiries should be made to determine whether any significant changes between prior years and the current year may have occurred, which might reduce the accuracy of the historical data For example, a recent change in credit-granting policies or changes in the general economy (entering a recessionary period, for example) could reduce the usefulness of analyzing historical data Based on the preceding analyses, a recommendation to decrease the annual rate charged as an expense may be in order (perhaps Xtreme Co is experiencing a lower rate of uncollectibles than is the industry average), or perhaps a change to the “estimate based on analysis of receivables” method may be appropriate CP 9–3 and Net sales………………………… Accounts receivable………… Average accts receivable…… Accts receivable turnover…… Average daily sales…………… Days’ sales in receivables…… Year Year $50,272 $2,348 $49,694 $2,020 $2,184.0 $1,944.0 [($2,348 + $2,020) ÷ 2] [($2,020 + $1,868) ÷ 2] 23.0 25.6 ($50,272 ÷ $2,184.0) ($49,694 ÷ $1,944.0) $137.7 $136.1 ($50,272 ÷ 365) ($49,694 ÷ 365) 15.9 14.3 ($2,184.0 ÷ $137.7) ($1,944.0 ÷ $136.1) The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 25.6 to 23.0, an unfavorable trend The days’ sales in receivables increased from 14.3 days to 15.9, an unfavorable trend Thus, based on (1) and (2), Best Buy has decreased its efficiency in the collection of receivables CP 9–3 (Concluded) We assumed that the percentage of credit sales to total sales remains constant from one period to the next and no major changes in operations occurred between years For example, if the percentage of credit sales to total sales is not similar or if the percentage changes between years, then the ratios would be distorted and, thus, not comparable Also, any major changes in operations could distort the comparison between years CP 9–4 Year 2: 14.7 {$65,225 ÷ [($5,510 + $3,361) ÷ 2]} Year 1: 14.8 {$42,905 ÷ [($3,361 + $2,422) ÷ 2]} Year 2: 24.8 days [($5,510 + $3,361) ÷ 2] = $4,435.5; [$4,435.5 ÷ ($65,225 ÷ 365)] Year 1: 24.6 days [($3,361 + $2,422) ÷ 2] = $2,891.5; [$2,891.5 ÷ ($42,905 ÷ 365)] The accounts receivable turnover indicates a slight decrease in the efficiency of collecting accounts receivable by decreasing from 14.8 to 14.7, an unfavorable trend The days’ sales in receivables increased from 24.6 days to 24.8, an unfavorable trend Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms CP 9–5 and Net sales……………………………… Accounts receivable……………… Average accts receivable………… Accts receivable turnover………… Average daily sales………………… Days’ sales in receivables………… Year Year $77,946 $1,321 $1,263.0 $71,422 $1,205 $1,107.0 [($1,321 + $1,205) ÷ 2] [($1,205 + $1,009) ÷ 2] 61.7 64.5 ($77,946 ÷ $1,263.0) ($71,422 ÷ $1,107.0) $213.6 $195.7 ($77,946 ÷ 365) ($71,422 ÷ 365) 5.9 5.7 ($1,263.0 ÷ $213.6) ($1,107.0 ÷ $195.7) The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 64.5 to 61.7, an unfavorable trend The days’ sales in receivables increased from 5.7 days to 5.9 days, an unfavorable trend Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms Costco’s accounts receivable turnover would normally be higher than that of a typical manufacturing company such as H.J Heinz Company This is because many of Costco’s customers charge their purchases to American Express cards or pay with checks or cash In contrast, the customers of H.J Heinz Company are other businesses that pay their accounts receivable on a less timely basis For a recent year, the accounts receivable turnover ratio for H.J Heinz was 9.3 (see Ex 9–27) Note: Costco does not accept MasterCard or Visa, but only American Express CP 9–6 Note to Instructors: The turnover ratios will vary over time Recently, the various turnover ratios (rounded to one decimal place) were as follows: Alcoa Inc ……………………………… AutoZone, Inc ………………………… Barnes & Noble, Inc ………………… Caterpillar ……………………………… The Coca-Cola Company …………… Delta Air Lines ……………………… The Home Depot ……………………… IBM ……………………………………… Kroger …………………………………… Procter & Gamble …………………… Walmart ………………………………… Whirlpool Corporation ……………… 10.3 58.4 54.5 2.6 8.6 18.0 66.4 3.4 93.7 12.0 91.4 7.0 Based on the above, the companies can be categorized as follows: Accounts Receivable Turnover Ratio Below 15 Above 15 Alcoa Inc Caterpillar The Coca-Cola Company IBM Procter & Gamble Whirlpool Corporation AutoZone, Inc Barnes & Noble, Inc Delta Air Lines The Home Depot Kroger Walmart The companies with accounts receivable turnover ratios above 15 are all companies selling primarily to individual consumers In contrast, companies with turnover ratios below 15 are companies selling primarily to other businesses Generally, we would expect companies selling to individual consumers to have higher turnover ratios, since many customers will charge their purchases on credit cards In contrast, companies selling to other businesses normally allow a credit period of at least 30 days or longer ... $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... 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:... 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