a financial mgr is considering operating a lock box. she forecast that 400 payments a day will be made to the lockbox with the average payment being $2,000. the banks charge for operating the lockbox is .40 cents per check. the interest rate is .025 per day. a. if the lock box saves tow days in collection float, is it a worthwhile to adopt the system? b. what minimum reduction in the time limit to collect and process each check is needed to justify use of the lock box? ************************************* I really need help with all of the follow section exercise 7 working 7 thru 17, please ercise 7-7 Exercise 7-8 (continued) Account Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,900 Allowance for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 (debit balance) The company has not yet recorded any bad debt expense for 2006. Determine the amount of bad debt expense to be recognized by Stardust Company for 2006, assuming the following independent situations: 1. An aging accounts receivable analysis indicates that probable uncollectible accounts receivable at year-end amount to $4,500. 2. Company policy is to maintain a provision for uncollectible accounts receivable equal to 3% of outstanding accounts receivable. 3. Company policy is to estimate uncollectible accounts receivable as equal to 0.5% of the previous year’s annual sales, which were $200,000. Accounting for Bad Debts The following data were associated with the accounts receivable and uncollectible accounts of Julia Jay, Inc., during 2006: a. The opening credit balance in Allowance for Bad Debts was $600,000 at January 1, 2006. b. During 2006, the company realized that specific accounts receivable totaling $630,000 had gone bad and had been written off. c. An account receivable of $35,000 was collected during 2006. This account had previously been written off as a bad debt in 2005. d. The company decided that Allowance for Bad Debts would be $650,000 at the end of 2006. 1. Prepare journal entries to show how these events would be recognized in the accounting system using: a. The direct write-off method. b. The allowance method. 2. Discuss the advantages and disadvantages of each method with respect to the matching principle. Accounting for Uncollectible Accounts Receivable Dodge Company had the following information relating to its accounts receivable at December 31, 2005, and for the year ended December 31, 2006: Accounts receivable balance at 12/31/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 900,000 Allowance for bad debts at 12/31/05 (credit balance) . . . . . . . . . . . . . . . . . . . . . . . 50,000 Gross sales during 2006 (all credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 Collections from customers during 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 Accounts written off as uncollectible during 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Estimated uncollectible receivables at 12/31/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 Dodge Company uses the percentage of receivables method to estimate bad debt expense. 1. At December 31, 2006, what is the balance of Dodge Company’s Allowance for Bad Debts? What is the bad debt expense for 2006? 2. At December 31, 2006, what is the balance of Dodge Company’s gross accounts receivable? Aging of Accounts Receivable Madariaga Company’s accounts receivable reveal the following balances: 328 Part 2 E O C Operating Activities Exercise 7-9 Exercise 7-10 Exercise 7-11 Age of Accounts Receivable Balance Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $840,000 1–30 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405,000 31–60 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000 61–90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 91–120 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 The credit balance in Allowance for Bad Debts is now $38,000. After a thorough analysis of its collection history, the company estimates that the following percentages of receivables will eventually prove uncollectible: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5% 1–30 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 31–60 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.0 61–90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.0 91–120 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.0 Prepare an aging schedule for the accounts receivable, and give the journal entry for recording the necessary change in the allowance for bad debts account. Aging of Accounts Receivable The following aging of accounts receivable is for Harry Company at the end of its first year of business: Aging of Accounts Receivable December 31, 2006 Less Than 30 31 to 60 61 to 90 Over 90 Overall Days Days Days Days Ken Nelson $ 10,000 $ 8,000 $1,000 $1,000 Elaine Anderson 40,000 31,000 $ 4,000 5,000 Bryan Crist 12,000 3,000 4,000 2,000 3,000 Renee Warner 60,000 50,000 10,000 Nelson Hsia 16,000 10,000 6,000 Stella Valerio 25,000 20,000 5,000 Totals $163,000 $122,000 $24,000 $8,000 $9,000 Harry Company has collected the following bad debt information from a consultant familiar with Harry’s industry: Percentage Ultimately Age of Account Uncollectible Less than 30 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2% 31–60 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 61–90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Selling a Product or a Service E O C Chapter 7 329 Exercise 7-12 (continued) 1. Compute the appropriate Allowance for Bad Debts as of December 31, 2006. 2. Make the journal entry required to record this allowance. Remember that, since this is Harry’s first year of operations, the allowance account at the beginning of the year was $0. 3. What is Harry’s net accounts receivable balance as of December 31, 2006? Direct Write-Off versus Allowance Method The vice president for Tres Corporation provides you with the following list of accounts receivable written off in the current year. (These accounts were recognized as bad debt expense at the time they were written off; i.e., the company was using the direct write-off method.) Date Customer Amount March 30 Rasmussen Company $12,000 July 31 Dodge Company 7,500 September 30 Larsen Company 10,000 December 31 Peterson Company 12,000 Tres Corporation’s sales are all on a n/30 credit basis. Sales for the current year total $3,600,000, and analysis has indicated that uncollectible receivable losses historically approximate 1.5% of sales. 1. Do you agree or disagree with Tres Corporation’s policy concerning recognition of bad debt expense? Why or why not? 2. If Tres were to use the percentage of sales method for recording bad debt expense, by how much would income before income taxes change for the current year? Accounting for Uncollectible Receivables—Percentage of Sales Method The trial balance of Marchant’s Sporting House, Inc., shows a $150,000 outstanding balance in Accounts Receivable at the end of 2005. During 2006, 80% of the total credit sales of $3,500,000 was collected, and no receivables were written off as uncollectible. The company estimated that 2.0% of the credit sales would be uncollectible. During 2007, the account of Prior Sybrowsky, who owed $4,200, was judged to be uncollectible and was written off. At the end of 2007, the amount previously written off was collected in full from Mr. Sybrowsky. Prepare the necessary journal entries for recording all the preceding transactions relating to uncollectibles on the books of Marchant’s Sporting House, Inc. Comparing the Percentage of Sales and the Percentage of Receivables Methods Keefer Company uses the percentage of sales method for computing bad debt expense. As of January 1, 2006, the balance of Allowance for Bad Debts was $200,000. Write-offs of uncollectible accounts during 2006 totaled $240,000. Reported bad debt expense for 2006 was $320,000, computed using the percentage of sales method. Keith & Harding, the auditors of Keefer’s financial statements, compiled an aging accounts receivable analysis of Keefer’s accounts at the end of 2006. This analysis has led Keith & Harding to estimate that, of the accounts receivable Keefer has as of the end of 2006, $700,000 will ultimately prove to be uncollectible. Given their analysis, Keith & Harding, the auditors, think that Keefer should make an adjustment to its 2006 financial statements. What adjusting journal entry should Keith & Harding suggest? Ratio Analysis The following are summary financial data for Parker Enterprises, Inc., and Boulder, Inc., for three recent years: 330 Part 2 E O C Operating Activities Exercise 7-13 Exercise 7-14 Exercise 7-15 Exercise 7-16 Year 3 Year 2 Year 1 Net sales (in millions): Parker Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,700 $ 3,875 $ 3,882 Boulder, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,825 16,549 15,242 Net accounts receivable (in millions): Parker Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 1,800 1,725 Boulder, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,525 5,800 6,205 1. Using the above data, compute the accounts receivable turnover and average collection period for each company for years 2 and 3. 2. Which company appears to have the better credit management policy? Assessing How Well Companies Manage Their Receivables Assume that Hickory Company has the following data related to its accounts receivable: 2005 2006 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,425,000 $1,650,000 Net receivables: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 333,500 End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000 375,000 Use these data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working capital: a.