Chapter 9

The MGM Mirage owns and operates casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of December 31, 2007, the MGM Mirage reported accounts and notes receivable of \(\$ 452,945,000\) and allowance for doubtful accounts of \(\$ 90,024,000\). Johnson \& Johnson manufactures and sells a wide range of health care products including Band-Aids and Tylenol. As of December 31, 2006, Johnson \& Johnson reported accounts receivable of \(\$ 8,872,000,000\) and allowance for doubtful accounts of \(\$ 160,000,000 .\) a. Compute the percentage of the allowance for doubtful accounts to the accounts and notes receivable as of December 31, 2006, for The MGM Mirage. b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable as of December 31, 2006, for Johnson \& Johnson. c. Discuss possible reasons for the difference in the two ratios computed in (a) and (b).

Journalize the following transactions in the accounts of Laser Tech Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables: Feb. 23. Sold merchandise on account to Dr. Judith Salazar, \(\$ 41,500\). The cost of the merchandise sold was \(\$ 22,300\). May 10. Received \(\$ 10,000\) from Dr. Judith Salazar and wrote off the remainder owed on the sale of February 23 as uncollectible. Dec. 2. Reinstated the account of Dr. Judith Salazar that had been written off on May 10 and received \(\$ 31,500\) cash in full payment.

Journalize the following transactions in the accounts of Food Unlimited Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables: Jan. 18. Sold merchandise on account to Wings Co., \(\$ 13,200\). The cost of the merchandise sold was \(\$ 9,500\). Mar. 31. Received \(\$ 5,000\) from Wings Co. and wrote off the remainder owed on the sale of January 18 as uncollectible. Sept. 3. Reinstated the account of Wings Co. that had been written off on March 31 and received \(\$ 8,200\) cash in full payment.

Tech Savvy, a computer consulting firm, has decided to write off the \(\$ 8,375\) balance of an account owed by a customer, Nick Wadle. Journalize the entry to record the writeoff, assuming that (a) the direct write-off method is used and (b) the allowance method is used.

At the end of the current year, the accounts receivable account has a debit balance of \(\$ 825,000\) and net sales for the year total \(\$ 9,400,000\). Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions: a. The allowance account before adjustment has a credit balance of \(\$ 11,200\). Bad debt expense is estimated at \(1 / 4\) of \(1 \%\) of net sales. b. The allowance account before adjustment has a credit balance of \(\$ 11,200\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 36,000\). c. The allowance account before adjustment has a debit balance of \(\$ 6,000\). Bad debt expense is estimated at \(1 / 2\) of \(1 \%\) of net sales. d. The allowance account before adjustment has a debit balance of \(\$ 6,000\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 49,500\).

Bubba's Auto Supply distributes new and used automobile parts to local dealers throughout the Southeast. Bubba's credit terms are \(n / 30\). As of the end of business on July 31 , the following accounts receivable were past due: \begin{aligned} &\begin{array}{llr} \text { Account } & \text { Due Date } & \text { Amount } \\ \hline \text { AAA Pickup Shop } & \text { May 30 } & \$ 6,000 \\ \text { Best Auto } & \text { July 14 } & 3,000 \\ \text { Downtown Repair } & \text { March 18 } & 2,000 \\ \text { Luke's Auto Repair } & \text { June I } & 5,000 \\ \text { New or Used Auto } & \text { June 18 } & 750 \\ \text { Sally's } & \text { April 12 } & 2,800 \\ \text { Trident Auto } & \text { May 31 } & 1,500 \\ \text { Washburn Repair \& Tow } & \text { March 13 } & 7,500 \end{array}\\\ &\text { Determine the number of days each account is past due. } \end{aligned}

Fonda Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company's accounts receivable on December 31, 2010, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows: \begin{tabular}{lrc} Age Interval & Balance & Percent Uncollectible \\ \hline Not past due & \(\$ 567,000\) & \(1 / 2 \%\) \\ \(1-30\) days past due & 58,000 & 3 \\ \(31-60\) days past due & 29,000 & 7 \\ \(61-90\) days past due & 20,500 & 15 \\ \(91-180\) days past due & 15,000 & 40 \\ Over 180 days past due & 10,500 & 75 \\ \cline { 2 - 3 } & \(\$ 700,000\) & \end{tabular} Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31, 2010 .

The following selected transactions were taken from the records of Lights of the West Company for the first year of its operations ending December 31, 2010: Jan. 24. Wrote off account of J. Huntley, \(\$ 3,000\). Feb. 17. Received \(\$ 1,500\) as partial payment on the \(\$ 4,000\) account of Karlene Solomon. Wrote off the remaining balance as uncollectible. May 29. Received \(\$ 3,000\) from J. Huntley, which had been written off on January 24 . Reinstated the account and recorded the cash receipt. Nov.30. Wrote off the following accounts as uncollectible (record as one journal entry): \(\begin{array}{lr}\text { Don O'Leary } & \$ 2,000 \\ \text { Kim Snider } & 1,500 \\ \text { Jennifer Kerlin } & 900 \\ \text { Tracy Lane } & 1,250 \\\ \text { Lynn Fuqua } & 450\end{array}\) Dec. 31. Lights of the West Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, \(1 \frac{1}{2} \%\) of credit sales are expected to be uncollectible. Lights of the West Company recorded \(\$ 975,000\) of credit sales during 2010 . a. Journalize the transactions for 2010 under the direct write-off method. b. Journalize the transactions for 2010 under the allowance method. c. How much higher (lower) would Lights of the West Company's net income have been under the direct write-off method than under the allowance method?

During its first year of operations, Master Plumbing Supply Co. had net sales of \(\$ 3,500,000\), wrote off \(\$ 50,000\) of accounts as uncollectible using the direct write-off method, and reported net income of \(\$ 390,500\). Determine what the net income would have been if the allowance method had been used, and the company estimated that \(13 / 4\) of net sales would be uncollectible.

Isner Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31, 2010: \begin{tabular}{lr} Customer & Amount \\ \hline L. Hearn & \(\$ 10,000\) \\ Carrie Murray & 9,500 \\ Kelly Salkin & 13,100 \\ Shana Wagnon & 2,400 \\ \(\quad\) Total & \(\$ 35,000\) \\ \hline \end{tabular} a. Journalize the write-offs for 2010 under the direct write-off method. b. Journalize the write-offs for 2010 under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded \(\$ 2,400,000\) of credit sales during 2010. Based on past history and industry averages, \(1 \frac{3}{4} \%\) of credit sales are expected to be uncollectible. c. How much higher (lower) would Isner Company's 2010 net income have been under the direct write-off method than under the allowance method?

OK International wrote off the following accounts receivable as uncollectible for the year ending December 31, 2010: \begin{tabular}{lr} Customer & Amount \\ \hline Eva Fry & \(\$ 6,500\) \\ Lance Landau & 11,200 \\ Marcie Moffet & 3,800 \\ Jose Reis & 3,500 \\ Total & \(\$ 25,000\) \\ \hline \end{tabular} The company prepared the following aging schedule for its accounts receivable on December 31, 2010: \begin{tabular}{lrc} Aging Class (Number of Days Past Due) & Receivables Balance on December 31 & Estimated Percent of Uncollectible Accounts \\ \hline \(0-30\) days & \(\$ 480,000\) & \(1 \%\) \\ \(31-60\) days & 100,000 & 3 \\ \(61-90\) days & 40,000 & 20 \\ \(91-120\) days & 25,000 & 30 \\ More than 120 days & 5,000 & 40 \\ Total receivables & \(\$ 650,000\) & \end{tabular} a. Journalize the write-offs for 2010 under the direct write-off method. b. Journalize the write-offs and the year-end adjusting entry for 2010 under the allowance method, assuming that the allowance account had a beginning balance of \(\$ 22,500\) on January 1, 2010, and the company uses the analysis of receivables method.

Determine the due date and the amount of interest due at maturity on the following notes: \begin{tabular}{llrrr} & Date of Note & Face Amount & Interest Rate & Term of Note \\ \hline a. & October 1 & \(\$ 10,500\) & \(8 \%\) & 60 days \\ b. & August 30 & 18,000 & 10 & 120 days \\ c. & May 30 & 12,000 & 12 & 90 days \\ d. & March 6 & 15,000 & 9 & 60 days \\ e. & May 23 & 9,000 & 10 & 60 days \end{tabular}

South Bay Interior Decorators issued a 90 -day, \(6 \%\) note for \(\$ 40,000\), dated April 15 , to Miami 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 Miami Furniture and (2) receipt of payment of the note at maturity.

The following selected transactions were completed by Alcor Co., a supplier of Velcro \({ }^{\mathrm{TM}}\) for clothing: 2009 Dec. 13. Received from Penick Clothing \& Bags Co., on account, an \(\$ 84,000,90\)-day, \(9 \%\) note dated December \(13 .\) 31\. Recorded an adjusting entry for accrued interest on the note of December \(13 .\) 31\. Recorded the closing entry for interest revenue. 2010 Mar. 12. Received payment of note and interest from Penick Clothing \& Bags Co. Journalize the transactions.

Journalize the following transactions of Funhouse Productions: July 8. Received a \(\$ 120,000,90\)-day, \(8 \%\) note dated July 8 from Mystic Mermaid Company on account. Oct. 6. The note is dishonored by Mystic Mermaid Company. Nov. 5. Received the amount due on the dishonored note plus interest for 30 days at \(10 \%\) on the total amount charged to Mystic Mermaid Company on October \(6 .\)

Journalize the following transactions in the accounts of Lemon Grove Co., which operates a riverboat casino: Mar. 1. Received a \(\$ 30,000,60\)-day, \(6 \%\) note dated March 1 from Bradshaw Co. on account. 18\. Received a \(\$ 25,000,60\)-day, \(9 \%\) note dated March 18 from Soto Co. on account. Apr. 30. The note dated March 1 from Bradshaw Co. is dishonored, and the customer's account is charged for the note, including interest. May 17. The note dated March 18 from Soto Co. is dishonored, and the customer's account is charged for the note, including interest. July 29. Cash is received for the amount due on the dishonored note dated March 1 plus interest for 90 days at \(8 \%\) on the total amount debited to Bradshaw Co. on April \(30 .\) Aug. 23. Wrote off against the allowance account the amount charged to Soto Co. on May 17 for the dishonored note dated March 18 .

List any errors you can find in the following partial balance sheet: \begin{tabular}{lrrr} \multicolumn{3}{c}{ Jennett Company Balance Sheet December 31, 2010 } \\ Current assets: & Assets & & \\ Cash & \(\$ 250,000\) & \\ Notes receivable & 15,000 & 235,000 \\ \(\quad\) Less interest receivable & \(\$ 398,000\) & \\ Accounts receivable & 36,000 & 434,000 \end{tabular}

D. Stoner Co., a building construction company, holds a 120 -day, \(9 \%\) note for \(\$ 60,000\), dated August 7, which was received from a customer on account. On October 6, the note is discounted at the bank at the rate of \(12 \%\). a. Determine the maturity value of the note. b. Determine the number of days in the discount period. c. Determine the amount of the discount. d. Determine the amount of the proceeds. e. Journalize the entry to record the discounting of the note on October \(6 .\)

Journalize the following transactions in the accounts of Zion Theater Productions: Mar. 1. Received a \(\$ 40,000,90\)-day, \(8 \%\) note dated March 1 from Gymboree Company on account. 31\. Discounted the note at Security Credit Bank at \(10 \%\). May 30. The note is dishonored by Gymboree Company; paid the bank the amount due on the note, plus a protest fee of \(\$ 200\). June 29. Received the amount due on the dishonored note plus interest for 30 days at \(12 \%\) on the total amount charged to Gymboree Company on May 30 .

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For the fiscal years 2007 and 2006, H.J. Heinz reported the following (in thousands): \begin{tabular}{lrr} \cline { 2 - 3 } & May 2, 2007 & Mear Ending \\ \cline { 2 - 4 } Net sales & \(\$ 9,001,630\) & \(\$ 8,643,438\) \\ Accounts receivable & 996,852 & \(1,002,125\) \end{tabular} Assume that the accounts receivable (in thousands) were \(\$ 1,092,394\) at the beginning of \(2006 .\) a. Compute the accounts receivable turnover for 2007 and 2006. Round to one decimal place. b. Compute the days' sales in receivables at the end of 2007 and 2006. Round to one decimal place. c. What conclusions can be drawn from these analyses regarding Heinz's efficiency in collecting receivables?

The Limited, Inc., sells women's and men's clothing through specialty retail stores. The Limited sells women's intimate apparel and personal care products through Victoria's Secret and Bath \& Body Works stores. The Limited reported the following (in millions): \begin{tabular}{lcc} & \multicolumn{2}{c}{ For the Period Ending } \\ \cline { 2 - 3 } & Feb. 3, 2007 & Jan. 28, 2006 \\ \hline Net sales & \(\$ 10,671\) & \(\$ 9,699\) \\ Accounts receivable & 176 & 182 \end{tabular} Assume that accounts receivable (in millions) were \(\$ 128\) on January 29, \(2005 .\) a. Compute the accounts receivable turnover for 2007 and 2006. Round to one decimal place. b. Compute the day's sales in receivables for 2007 and 2006. Round to one decimal place. c. What conclusions can be drawn from these analyses regarding The Limited's efficiency in collecting receivables?