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Chapter 7: Q7-2FSAC (page 380)

Case 2: Microsoft Corporation

Question: Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. The following is the current asset and current liability information from Microsoft鈥檚 current balance sheets (in millions). Following the Microsoft data is the current asset and current liability information from

Oracle鈥檚 current balance sheets (in millions). Oracle is another major software developer.

Part 1 (Cash and Cash Equivalents)

  1. Instructions
  2. What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments?
  3. Calculate (1) the current ratio and
    (2) working capital for each company for 2014 and discuss your results.
  4. Is it possible to have too many liquid assets?
  5. Part 2 (Accounts Receivable)

Microsoft provided the following disclosure related to its accounts receivable.

Instructions

  1. Compute Microsoft鈥檚 accounts receivable turnover for 2014 and discuss your results. Microsoft had sales revenue of $69,943 million in 2014.
  2. Reconstruct the summary journal entries for 2014 based on the information in the disclosure.
  3. Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a).

Short Answer

Expert verified

Answer

Oracle鈥檚 current ratio is higher. Based on these measures, Oracle is more liquid. The current ratio of Oracle is more than Microsoft. Microsoft has more working capital. Net credit sales are 3.78 times, and bad debt expense is $16.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Trade Receivable

In accounting, trade receivables can be anything sold that a company owes another company. In other words, trade receivables are what a company owes for goods and services.

02

(1 a) Explaining cash equivalent.

Generally speaking, cash equivalents are short-term, highly liquid assets that (a) can easily be converted to cash and (b) are close to maturity, posing little interest rate risk.

An investor can only invest in a product with an initial maturity of three months or less. Treasury notes, commercial paper, and money market funds are some examples of cash equivalents.

03

(1 b1) Determining the ratios for different companies.

Calculating the current ratio of Microsoft

颁耻谤谤别苍迟鈥塺补迟颈辞=颁耻谤谤别苍迟鈥塧蝉蝉别迟颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉=$114,246$45,625=2.50

Calculating the current ratio of Oracle

颁耻谤谤别苍迟鈥塺补迟颈辞=颁耻谤谤别苍迟鈥塧蝉蝉别迟颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉=$48,138$14,389=3.35


04

(1 b2) Calculating Working capital.

Calculating working capital for Microsoft

奥辞谤办颈苍驳鈥塩补辫颈迟补濒=颁耻谤谤别苍迟鈥塧蝉蝉别迟鈭�颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉=$114,246鈭�$45,625=$68,621

Calculating working capital for Oracle

奥辞谤办颈苍驳鈥塩补辫颈迟补濒=颁耻谤谤别苍迟鈥塧蝉蝉别迟鈭�颁耻谤谤别苍迟鈥塴颈补产颈濒颈迟颈别蝉=$48,138鈭�$14,389=$33,749


Oracle鈥檚 current ratio is higher. Based on these measures, Oracle is more liquid.
05

(1 c) Determine the possibility of having too many liquids.

Yes, a corporation might have an excessive amount of liquid assets. Liquid assets yield little or no profit. Investors in businesses like Microsoft see 30 percent returns on their money. As a result, Microsoft's significant quantity of liquid assets may limit its ability to achieve investor expectations.

06

(2 a) Computing Microsoft accounts receivable turnover for 2014

础肠肠辞耻苍迟鈥塺别肠别颈惫补产濒别=狈别迟鈥塩谤别诲颈迟鈥塻补濒别蝉础惫别谤补驳别鈥塧肠肠辞耻苍迟鈥塺别肠颈惫补产濒别=$69,943$19,554+$17,4862=$69,943$18,515=3.78鈥塼颈尘别蝉

07

(2 b) Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Bad Debt Expense

16

Allowance for Doubtful Accounts

16

Allowance for Doubtful Accounts

51

Accounts Receivable

51

08

(2 c) Explaining accounting for bad debts

Step 8: (2 c) Explaining accounting for bad debts

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Most popular questions from this chapter

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.

1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.

2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.

3. The ledger has not been closed for 2017.

4. The amount shown as inventory was determined by physical count on December 31, 2017.

The company uses the periodic method of inventory.

Instructions

(a) Prepare any entries you consider necessary to correct Francis鈥檚 accounts at December 31.

(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:

Debit

Credit

Cash

\(39,000

Accounts receivables

42,000

Inventory

67,00

Accounts payable

\)45,000

Other Current liabilities

14,200

Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Taylor Swift Inc. shows the following balances.

Debit

Credit

Accounts Receivable

\(90,000

Allowance for Doubtful Accounts

1,750

Sales revenue (all on credit)

\)680,000

Instructions

Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,700 credit balance.

(Bank Reconciliation and Adjusting Entries) The cash account of Aguilar Co. showed a ledger balance of \(3,969.85 on June 30, 2017. The bank statement as of that date showed a balance of \)4,150. Upon comparing the statement with the cash records, the following facts were determined.

1. There were bank service charges for June of \(25.

2. A bank memo stated that Bao Dai鈥檚 note for \)1,200 and interest of \(36 had been collected on June 29, and the bank had made a charge of \)5.50 on the collection. (No entry had been made on Aguilar鈥檚 books when Bao Dai鈥檚 note was sent to the bank for collection.)

3. Receipts for June 30 for \(3,390 were not deposited until July 2.

4. Checks outstanding on June 30 totaled \)2,136.05.

5. The bank had charged the Aguilar Co.鈥檚 account for a customer鈥檚 uncollectible check amounting to \(253.20 on June 29.

6. A customer鈥檚 check for \)90 (as payment on the customer鈥檚 Accounts Receivable) had been entered as \(60 in the cash receipts journal by Aguilar on June 15.

7. Check no. 742 in the amount of \)491 had been entered in the cash journal as \(419, and check no. 747 in the amount of \)58.20 had been entered as $582. Both checks had been issued to pay for purchases and were payments on Aguilar鈥檚 Accounts Payable.

Instructions

(a) Prepare a bank reconciliation dated June 30, 2017, proceeding to a correct cash balance.

(b) Prepare any entries necessary to make the books correct and complete.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment鈥檚 list price. Each note鈥檚 stated interest rate is below the customer鈥檚 market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

At December 31, 2017, how should Corrs measure and account for the impact of estimated losses resulting from notes receivable that it

(1) Retained and did not sell?

(2) Sold to bank with recourse?

Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books.

(a) Deposit in transit \(5,500.

(d) Outstanding checks \)7,422.

(b) Bank service charges \(25.

(e) NSF check returned \)377.

(c) Interest credited to Horton鈥檚 account $31.
See all solutions

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