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Chapter 8: Q26E (page 474)

Evaluating ratio data

Silver Clothiers reported the following selected items at April 30, 2018 (last year鈥檚鈥�2017鈥攁mounts also given as needed):

Requirements

1. Calculate Abanaki鈥檚 acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki鈥檚 acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki鈥檚 acid-test ratio compare with the industry average of 0.80?

2. Calculate Abanaki鈥檚 accounts receivable turnover ratio. (Round to two decimals.) How does Abanaki鈥檚 ratio compare to the industry average accounts receivable turnover of 10?

3. Calculate the days鈥� sales in receivables for 2018. (Round to the nearest day.) How do the results compare with Abanaki鈥檚 credit terms of net 30?

Short Answer

Expert verified
  1. The acid-test ratio is 0.82 on April 30, 2018
  2. The accounts receivable turnover ratio is 11.6 times.
  3. The day sales in receivable are 31 days.

Step by step solution

01

Definition of acid-test ratio

The acid-test ratio measures the company鈥檚 ability to meet its short-term obligations with cash and cash equivalents. It is also called a Quick Ratio.

02

Step 2:  Calculation of Acid-test ratio

April 30, 2017:

Acid-Test鈥夆赌�Ratio=Cash+Short-term鈥�Investment+CurrentReceivablesTotal鈥夆赌�Current鈥夆赌�Liabilities=$11,000+$14,000+$71000$107,000=0.89

April 30, 2018:

Acid-Test鈥夆赌�Ratio=Cash+Short-termInvestment+CurrentReceivablesTotal鈥夆赌�Current鈥夆赌�Liabilities=$5,000+$25,000+$57,000$105,000=0.82

Abenakis acid-test ratio declined from 2017 to 2018 from 0.89 to 0.82. Although compared with the industry rate of 0.80, Abenakis acid-test ratio is considered good.

03

 Calculation of accounts receivable turnover ratio

Accounts鈥夆赌�Turnover鈥夆赌�Ratio=Net鈥夆赌�Credit鈥夆赌�SalesAverage鈥夆赌�Net鈥夆赌�Accounts鈥夆赌�Receivables=$742,400$64,000=11.6鈥夆赌�times

Abanaki鈥檚has a Faster collection when it compares with Industry.

04

Calculation of day sales receivables

Day's鈥夆赌�Sales鈥夆赌�in鈥夆赌�Receivables=365鈥夆赌�DaysAccounts鈥夆赌�Receivable鈥�Turnover鈥�Ratio=36511.6=31鈥夆赌�Days

Abanaki鈥檚longer collection periodwhen compared with Industry.

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Most popular questions from this chapter

What does the accounts receivable turnover ratio measure, and how is it calculated?

Accounting for uncollectible accounts using the allowance method

This problem continues the Canyon Canoe Company situation from Chapter 7.

Canyon Canoe Company has experienced rapid growth in its first few months of operations and has had a significant increase in customers renting canoes and purchasing T-shirts. Many of these customers are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have decided it is time to review their business transactions and update some of their business practices. Their first step is to make decisions about handling accounts receivable.

So far, year-to-date credit sales have been \(15,500. A review of outstanding

receivables resulted in the following aging schedule:


Age of Accounts as of June 30, 2019

Customer name

1-30 days

31-60 days

61-90 days

Over 90 days

Total balance

Canyon

\)250

\(250

Crazy trees

\)200

\(150

\)350

Early start Daycare

\(500

Lakefront Pavilion

\)575

\(500

\)575

Outdoor Center

\(300

\)300

Rivers Canoe Club

\(350

\)350

Sport Shirts

\(450

\)120

\(570

Zack鈥檚 Marina

\)75

\(75

\)225

Totals

\(1,900

\)345

\(375

\)500

$3,120

Requirements

1. The company wants to use the allowance method to estimate bad debts. Determine the estimated bad debts expense under the following methods at June 30, 2019. Assume a zero-beginning balance for Allowance for Bad Debts. Round to the nearest dollar.

a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.

b. Percent-of-receivables method, assuming 22.5% of receivables will not be

collected.

c. Aging-of-receivables method, assuming 5% of invoices 1鈥�30 days will not be

collected, 20% of invoices 31鈥�60 days, 40% of invoices 61鈥�90 days, and 75% of

invoices over 90 days.

2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales method.

3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.

4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts. Assume a zero beginning balance for Allowance for Bad Debts.

5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on June 30, 2019.

Recording credit sales and collections

Steller Corporation had the following transactions in June:

Jun .1

Sold merchandise inventory on account to Carter Company, \(1,575.

6

Sold merchandise inventory for cash, \)550

12

Received cash from Carter Company in full settlement of its accounts receivable

20

Sold merchandise inventory on account to Iris Company, \(765

22

Sold merchandise inventory on account to Driver Company, \)230

28

Received cash from Iris Company in partial settlement of its accounts receivable, \(300

Requirements

1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.

2. Post the transactions to the general ledger and the accounts receivable subsidiary

ledger. Assume all beginning balances are \)0.

3. Verify the ending balance in the control Accounts Receivable equals the sum of the

balances in the subsidiary ledger.

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles.

Requirements

1. Journalize Fall Wine Tour鈥檚 Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018

Accounting for uncollectible accounts using the allowance method

(aging-of-receivables) and reporting receivables on the balance sheet

At September 30, 2018, the accounts of Spring Mountain Medical Center (SMMC)

include the following:

During the last quarter of 2018, SMMC completed the following selected transactions:

鈥� Sales on account, \(475,000. Ignore Cost of Goods Sold.

鈥� Collections on account, \)451,800.

鈥� Wrote off accounts receivable as uncollectible: Randall, Co., \(1,800; Oliver Welch,

\)900; and Rain, Inc., \(500

鈥� Recorded bad debts expense based on the aging of accounts receivable, as follows:

Age of Accounts

1鈥�30 Days 31鈥�60

Days

61鈥�90

Days

Over 90

Days

Accounts Receivable \) 97,000 \( 37,000 \) 17,000 $ 14,000

Estimated percent uncollectible 0.3% 3% 30% 35%

Requirements

1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.

Journalize the transactions (omit explanations) and post to the two accounts.

2. Show how Spring Mountain Medical Center should report net accounts receivable

on its December 31, 2018, balance sheet.
See all solutions

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