Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.

Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.

a. Compute the average accounts receivable turnover ratio for Campbell Soup and American Eagle for the years shown in Exercises 9-27 and 9-28.

b.  Does Campbelll Soup or American Eagle have the higher average accounts receivable turnover ratio?

c.  Explain why the average turnover ratios are different in (b).

Answer:

a. The average accounts receivable turnover ratios are as follows:

Campbell Soup:  12.47   [(12.27 + 12.67) ÷ 2]

American Eagle Outfitters:  46.76   [(47.28 + 46.24) ÷ 2]

Note:  For computations of the individual ratios, see Ex. 9-27 and Ex. 9-28.

b. American Eagle Outfitters has the higher average accounts receivable turnover ratio.

c. American Eagle Outfitters operates a specialty retail chain of stores that sells directly to individual consumers. Many of these consumers (retail customers) pay using MasterCard or VISA, which is recorded as cash sales. In contrast, Campbell Soup manufactures foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Campbell’s products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Campbell Soup to have more accounts receivable than American Eagle. In addition, we would expect Campbell’s business customers to take a longer period to pay their receivables. Thus, we would expect Campbell’s average accounts receivable turnover ratio to be lower than American Eagle, as shown in a.

American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores

American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. American Eagle reported the following data (in millions) for two recent years:

                    Year 2 | Year 1

Sales               $3,522 | $3,283

Accounts receivable     81 |     68

Assume that accounts receivable (in millions) were $74 million  at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.

b. Compute the day’s sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.

c. What conclusions can be drawn from these analyses regarding American Eagle Outfitters’ efficiency in collecting receivables?

Answer:

a. and b.

Sales.................................... 

Average accts. receivable......... 

Accts. receivable turnover......... 

Average daily sales.................. 

Days’ sales in receivables......... 

The days’ sales in receivables could also be computed by dividing 365 days by

the accounts receivable turnover as follows:

Year 2: 7.7 (365 days ÷ 47.28) (Difference due to rounding)

Year 1: 7.9 (365 days ÷ 46.24)

c. The accounts receivable turnover indicates an increase in the efficiency of 

collecting accounts receivable by increasing from 46.24 to 47.28, a favorable

change. The days’ sales in receivables indicates an increase in the efficiency of 

collecting accounts receivable by decreasing from 7.9 to 7.8, also indicating a 

favorable change. Before a conclusion can be reached, however, the ratios should 

be compared with industry averages and similar firms.

The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data

The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data (in millions) were reported by Campbell Soup for two recent years:

                     Year 2 | Year 1

Sales                $8,082 | $8,268

Accounts receivable     647 |    670

Assume that the accounts receivable (in thousands) were $635 million at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round average accounts receivable to one decimal place and accounts receivable turnover to two decimal places.

b. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.

c.  What conclusions can be drawn from these analyses regarding Campbell’s efficiency in collecting receivables?

Answer:

a. and b.

Sales.................................... 

Average accts. receivable...... 

Accts. receivable turnover...... 

Average daily sales............... 

Days’ sales in receivables...... 

The days’ sales in receivables could also be computed by dividing 365 days by

the accounts receivable turnover as follows:

Year 2: 29.7 (365 days ÷ 12.27) (Difference due to rounding)

Year 1: 28.8 (365 days ÷ 12.67) (Difference due to rounding)

c. The accounts receivable turnover indicates a decrease in the efficiency of  

collecting accounts receivable by decreasing from 12.67 to 12.27, an unfavorable 

change. The number of days’ sales in receivables increased from 28.7 to 29.8 days, 

also indicating an unfavorable change in collections of receivables. However, 

before a final conclusion can be reached, both ratios should be compared

with those of past years, industry averages, and similar firms.

Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products.

Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren, Polo Jeans Co., and Chaps. Polo Ralph Lauren reported the following (in thousands) for two recent years:

For the Period Ending Year 2 Year 1 Sales $7,620,000 $7,450,000 Accounts receivable 857,000 800,000

Assume that accounts receivable (in millions) were $607,000 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.

b. Compute the days’ sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.

c.  What conclusions can be drawn from these analyses regarding Ralph Lauren’s efficiency in collecting receivables?

Answer:

a. and b.

Sales.................................... 

Average accts. receivable...... 

Accts. receivable turnover...... 

Average daily sales............... 

Days’ sales in receivables...... 

The days’ sales in receivables could also be computed by dividing 365 days by

the accounts receivable turnover as follows:

Year 2: 39.7 (365 days ÷ 9.20)

Year 1: 34.5 (365 days ÷ 10.59)

c. The accounts receivable turnover indicates a slight decrease in the efficiency of 

collecting accounts receivable by decreasing from 10.59 to 9.20, an unfavorable

change. The days’ sales in receivables also indicates a decrease in the efficiency 

of collecting accounts receivable by increasing from 34.5 to 39.7, which is an

unfavorable change. However, before reaching a final conclusion, the ratios 

should be compared with industry averages and similar firms.

List any errors you can find in the following partial balance sheet:1. The interest receivable should be reported separately as a current asset.

List any errors you can find in the following partial balance sheet:

Answer:

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:

Current assets:

Cash$ 78,500

Notes receivable300,000

Accounts receivable$1,200,000

Less allowance for doubtful accounts 11,500 1,188,500

Interest receivable4,500

Journalize the following transactions in the accounts of Safari Games Co., which operates a riverboat casino:

Journalize the following transactions in the accounts of Safari Games Co., which operates a riverboat casino:

Apr. 18. Received a $60,000, 30-day, 7% note dated April 18 from Glenn Cross on account.

30. Received a $42,000, 60-day, 8% note dated April 30 from Rhoni Melville on account.

May 18. The note dated April 18 from Glenn Cross is dishonored, and the customer’s account is charged for the note, including interest.

June 29. The note dated April 30 from Rhoni Melville is dishonored, and the customer’s account is charged for the note, including interest.

Aug. 16. Cash is received for the amount due on the dishonored note dated April 18 plus interest for 90 days at 8% on the total amount debited to Glenn Cross on  May 18.

Oct. 22. Wrote off against the allowance account the amount charged to Rhoni Melville on June 29 for the dishonored note dated April 30.

Answer:

Apr. 18 Notes Receivable60,000

Accounts Receivable—Glenn Cross60,000

30 Notes Receivable42,000

Accounts Receivable—Rhoni Melville 42,000

 May 18 Accounts Receivable—Glenn Cross 60,350

Notes Receivable60,000

Interest Revenue350

($60,000 × 7% × 30 ÷ 360).

 June 29 Accounts Receivable—Rhoni Melville 42,560

Notes Receivable42,000

Interest Revenue560

($42,000 × 8% × 60 ÷ 360).

 Aug. 16 Cash61,557

Accounts Receivable—Glenn Cross60,350

Interest Revenue1,207

($60,350 × 8% × 90 ÷ 360).

 Oct. 22 Allowance for Doubtful Accounts 42,560

Accounts Receivable—Rhoni Melville 42,560

Journalize the following transactions of Trapper Jon’s Productions: June 23. Received a $48,000, 90-day, 8% note dated June 23 from Radon Express Co

Journalize the following transactions of Trapper Jon’s Productions:

June 23. Received a $48,000, 90-day, 8% note dated June 23 from Radon Express Co. on  account.

Sept. 21. The note is dishonored by Radon Express Co.

Oct. 21. Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Radon Express Co. on September 21.

Answer:

June 23 Notes Receivable48,000

Accounts Receivable—Radon Express Co. 48,000

 Sept. 21 Accounts Receivable—Radon Express Co. 48,960

Notes Receivable48,000

Interest Revenue960

($48,000 × 0.08 × 90 ÷ 360).

 Oct. 21 Cash49,368

Accounts Receivable—Radon Express Co. 48,960

Interest Revenue408

($48,960 × 0.10 × 30 ÷ 360).

The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:

The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:

20Y3

Nov. 21. Received from McKenna Outer Wear Co., on account, a $96,000, 60-day, 3% note dated November 21 in settlement of a past due account.

Dec. 31. Recorded an adjusting entry for accrued interest on the note of December 3.

20Y4

Jan. 20. Received payment of note and interest from McKenna Outer Wear Co. 

Journalize the entries to record the transactions.

Answer:

20Y3

 Nov. 21 Notes Receivable96,000

Accounts Receivable—McKenna Outer Wear Co. 96,000

 Dec. 31 Interest Receivable320

Interest Revenue320

Accrued interest ($96,000 × 0.03 × 40 ÷ 360).

 20Y4

 Jan. 20 Cash96,480

Notes Receivable96,000

Interest Receivable320

Interest Revenue ($96,000 × 0.03 × 20 ÷ 360) 160

The series of five transactions recorded in the following T accounts were related to a sale to a customer on account and the receipt of the amount owed

The series of five transactions recorded in the following T accounts were related to a sale to a customer on account and the receipt of the amount owed. Briefly describe each transaction.

Cash Notes Receivable (e) 76,500(c) 75,000 (d) 75,000 Accounts Receivable Cost of Goods Sold (a) 75,000 (c) 75,000 (b) 45,000 (d) 75,400 (b) 75,400 InventoryInterest Revenue (b) 45,000(d) 400 (e) 1,100 Sales (a) 75,000

Answer:

a. Sale on account.

b. Cost of goods sold for the sale on account.

c. Note received from customer on account.

d. Note dishonored and charged face value of note plus interest to customer’s account receivable.

e. Payment received from customer for dishonored note plus interest earned after due date.

Spring Designs & Decorators issued a 120-day, 4% note for $60,000, dated April 13 to Jaffe Furniture Company on account.

Spring Designs & Decorators issued a 120-day, 4% note for $60,000, dated April 13 to Jaffe Furniture Company on account.

a. Determine the due date of the note.

b. Determine the maturity value of the note.

c. Journalize the entries to record the following: (1) receipt of the note by Jaffe Furniture and (2) receipt of payment of the note at maturity.

Answer:

a. August 11  (17 + 31 + 30 + 31 + 11)

b. $60,800  [($60,000 × 4% × 120 ÷ 360) + $60,000]

c. (1)  Apr. 13 Notes Receivable60,000

Accounts Rec.—Spring Designs & 

Decorators60,000

(2)  Aug. 11 Cash60,800

Notes Receivable60,000

Interest Revenue800

Determine the due date and the amount of interest due at maturity on the following notes:Date of Note Face Amount Interest Rate Term of Note

Determine the due date and the amount of interest due at maturity on the following notes:

Date of Note Face Amount Interest Rate Term of Note a. January 10* $40,000 5% 90 days b. March 19 18,000 8 180 days c. June 5 90,000 7 30 days d. September 8 36,000 3 90 days e. November 20 27,000 4 60 days *Assume that February has 28 days. 

Answer:

Due Date      Interest

a. Apr. 10   $500  [$40,000 × 0.05 × (90 ÷ 360)]

b. Sept. 15   720  [$18,000 × 0.08 × (180 ÷ 360)]

c. July 5     525  [$90,000 × 0.07 × (30 ÷ 360)]

d. Dec. 7     270  [$36,000 × 0.03 × (90 ÷ 360)]

e. Jan. 19    180  [$27,000 × 0.04 × (60 ÷ 360)]

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:

Customer       Amount

Kim Abel     $ 21,550

Lee Drake      33,925

Jenny Green    27,565

Mike Lamb      19,460

Total        $102,500

The company prepared the following aging schedule for its accounts receivable on December 31:

Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Percent of   Uncollectible Accounts 0–30 days $ 715,000 1% 31–60 days 310,000 2 61–90 days 102,000 15 91–120 days 76,000 30 More than 120 days 97,000 60 Total receivables $1,300,000

a. Journalize the write-offs under the direct write-off method.

b. Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $95,000 on January 1 and the company uses the analysis of receivables method.

c. How much higher (lower) would Seaforth International’s net income have been under the allowance method than under the direct write-off method?

Answer:

a. Bad Debt Expense102,500

Accounts Receivable—Kim Abel21,550

Accounts Receivable—Lee Drake33,925

Accounts Receivable—Jenny Green27,565

Accounts Receivable—Mike Lamb19,460

b. Allowance for Doubtful Accounts 102,500

Accounts Receivable—Kim Abel21,550

Accounts Receivable—Lee Drake33,925

Accounts Receivable—Jenny Green27,565

Accounts Receivable—Mike Lamb19,460

Bad Debt Expense117,150

Allowance for Doubtful Accounts117,150

Uncollectible accounts estimate

($109,650 + $7,500).

Computations:

Percent Amount

 0–30 days1% $ 7,150

 31–60 days2% 6,200

 61–90 days15% 15,300

 91–120 days30% 22,800

 More than 120 days60% 58,200

Total receivables$109,650

Unadjusted debit balance of Allowance for Doubtful Accounts

($102,500 – $95,000).............................................................................. $ 7,500

Estimated balance of Allowance for Doubtful Accounts

from aging schedule.............................................................................. 109,650

Adjustment............................................................................................. $117,150

c. Net income would have been $14,650 lower 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).

Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:

Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:

Customer          Amount

Shawn Brooke     $ 4,650

Eve Denton         5,180

Art Malloy        11,050

Cassie Yost        9,120

Total            $30,000

a. Journalize the write-offs under the direct write-off method.

b. Journalize the write-offs under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded $5,250,000 of credit sales during the year. Based on past history and industry averages, 3⁄4% of credit sales are expected to be uncollectible.

c. How much higher (lower) would Casebolt Company’s net income have been under the direct write-off method than under the allowance method?

Answer:

a. Bad Debt Expense30,000

Accounts Receivable—Shawn Brooke4,650

Accounts Receivable—Eve Denton5,180

Accounts Receivable—Art Malloy11,050

Accounts Receivable—Cassie Yost9,120

b. Allowance for Doubtful Accounts 30,000

Accounts Receivable—Shawn Brooke4,650

Accounts Receivable—Eve Denton5,180

Accounts Receivable—Art Malloy11,050

Accounts Receivable—Cassie Yost9,120

Bad Debt Expense39,375

Allowance for Doubtful Accounts39,375

Uncollectible accounts estimate

($5,250,000 × 0.75% = $39,375).

c. Net income would have been $9,375 higher under the direct write-off method

because bad debt expense would have been $9,375 lower under the direct

method ($39,375 expense under the allowance method versus $30,000 expense 

under the direct write-off method).

Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co

Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co. had sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.

a. Determine what net income would have been in the second year if the allowance method (using 1% of sales) had been used in both the first and second years.

b. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years. Hint: Use an Allowance for Doubtful Accounts T account.

Answer:

$593,000, computed as follows: 

a. Net income under direct method....................................... $600,000

Bad debt expense under direct method.............................. $34,000

Bad debt expense under allowance method

($4,100,000 × 1% )......................................................... 41,000

Less increase in bad debt expense under

allowance method......................................................... 7,000

Net income under allowance method................................. $593,000

b. $11,700, as shown in the following T account:

Year 1 Write-offs 27,800 Year 1 Adj. Entry 32,500

Bal. 4,700

Year 2 Write-offs 34,000 Year 2 Adj. Entry 41,000

Bal. 11,700

During its first year of operations, Mack’s Plumbing Supply Co. had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible

During its first year of operations, Mack’s Plumbing Supply Co. had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.

Answer:

$482,800, computed as follows: 

Net income under direct method............................................. $487,500

Bad debt expense under direct method.................................... $27,800

Bad debt expense under allowance method

($3,250,000 × 1% )............................................................... 32,500

Less increase in bad debt expense under allowance method...... 4,700

Net income under allowance method....................................... $482,800

EX 9-14 Entries for bad debt expense under the direct write-off and allowance methods

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:

June 8. Wrote off account of Kathy Quantel, $8,440.

Aug. 14. Received $3,000 as partial payment on the $12,500 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible.

Oct. 16. Received the $8,440 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt.

Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):

Wade Dolan $4,600

Greg Gagne 3,600

Amber Kisko 7,150

Shannon Poole 2,975

Niki Spence 6,630

31. If necessary, record the year-end adjusting entry for uncollectible accounts.

a. Journalize the transactions under the direct write-off method.

b. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $36,000 on January 1 and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:

Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Percent of   Uncollectible Accounts 0–30 days $320,000 1% 31–60 days 110,000 3 61–90 days 24,000 10 91–120 days 18,000 33 More than 120 days 43,000 75 Total receivables $515,000

c.  How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?

Answer:

a.  June 8 Bad Debt Expense8,440

Accounts Receivable—Kathy Quantel 8,440

 Aug. 14 Cash3,000

Bad Debt Expense9,500

Accounts Receivable—Rosalie Oakes 12,500

 Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Bad Debt Expense8,440

16 Cash8,440

Accounts Receivable—Kathy Quantel 8,440

 Dec. 31 Bad Debt Expense24,955

Accounts Receivable—Wade Dolan 4,600

Accounts Receivable—Greg Gagne 3,600

Accounts Receivable—Amber Kisko 7,150

Accounts Receivable—Shannon Poole 2,975

Accounts Receivable—Niki Spence 6,630

31 No entry

b.  June 8 Allowance for Doubtful Accounts 8,440

Accounts Receivable—Kathy Quantel 8,440

 Aug. 14 Cash3,000

Allowance for Doubtful Accounts 9,500

Accounts Receivable—Rosalie Oakes 12,500

 Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Allowance for Doubtful Accounts 8,440

16 Cash8,440

Accounts Receivable—Kathy Quantel 8,440

 Dec. 31 Allowance for Doubtful Accounts 24,955

Accounts Receivable—Wade Dolan 4,600

Accounts Receivable—Greg Gagne 3,600

Accounts Receivable—Amber Kisko 7,150

Accounts Receivable—Shannon Poole 2,975

Accounts Receivable—Niki Spence 6,630

31 Bad Debt Expense45,545

Allowance for Doubtful Accounts 45,545

Uncollectible accounts estimate

($47,090 – $1,545).

Computations:

Percent Amount

 0–30 days1% $ 3,200

 31–60 days3% 3,300

 61–90 days10% 2,400

 91–120 days33% 5,940

 More than 120 days75% 32,250

Total receivables$47,090

Estimated balance of allowance account from aging schedule..................... $47,090

Unadjusted credit balance of allowance account....................................... 1,545

Adjustment............................................................................................. $45,545

* $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545

c. Bad debt expense under:

Allowance method........................................................................... $45,545

Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)............... 34,455

Difference....................................................................................... $11,090

Rustic Tables’ income would have been $11,090 higher under the direct write-off 

method than under the allowance method.