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ch06 - CHAPTER 6 THE CURRENT ASSET CLASSIFICATION CASH AND...

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CHAPTER 6 THE CURRENT ASSET CLASSIFICATION, CASH, AND ACCOUNTS RECEIVABLE BRIEF EXERCISES BE6–1 a. Total Accounts Receivable = Net Receivables + Allowance for Uncollectibles 2003 Total Accounts Receivable = $2,650 + $82 2003 Total Accounts Receivable = $2,732 2003 Uncollectibles as a Percentage of Total Accounts Receivable = $82/$2,732 = 3.0% 2002 Total Accounts Receivable = $2,513 + $90 2002 Total Accounts Receivable = $2,603 2002 Uncollectibles as a Percentage of Total Accounts Receivable = $90/$2,603 = 3.5% Therefore, the percentage increased. b. Since Emerson Electric is using the percentage of accounts receivable method (balance sheet approach), bad debt expense for 2003 would be the amount needed to adjust the allowance for doubtful accounts to $82. This number (bad debt expense) is impacted by the balance in the uncollectible account at the beginning of the year and the write-offs taken during the year by Emerson Electric. BE6–2 a. 2002: Ending Allowance Balance = Beginning Allowance Balance + Bad Debt Charge – Write-Offs + Recoveries $5,500 = $4,792 + 3,788 $3,722 + 642 Bad Debt Expense for 2002 = $3,788 2003: Ending Allowance Balance = Beginning Allowance Balance + Bad Debt Charge – Write-Offs + Recoveries $6,256 = $5,500 + 4,400 $4,492 + 848 Bad Debt Expense for 2003 = $4,400 b. 2002: $3,722 write-offs; $3,080 write-offs, net of recoveries 2003: $4,492 write-offs; $3,644 write-offs, net of recoveries 1
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c. The allowance account grew by 13.7% (($6,256- $5,500)/$5,500) from 2002 to 2003. This could have happened because the overall sales of the company and the gross amount of accounts receivables grew at a similar rate for General Electric. Another reason that the allowance account grew by this percentage was a decrease in the quality of the receivables and, therefore, General Electric felt that a higher percentage of customer receivables would not be collectible. BE6–3 a. GE bad debts as a percentage of total revenues = $3.7/$134 = 2.8%; as a percentage of GECS revenues, the calculation is $3.7/$64 = 5.8%. GE overall revenues should be used since the bad debt provision is for GE and not for GECS. b. On a balance sheet for GECS accounts receivable would be expected to be the largest account. Its primary role is as a financing company, and the receivables from the buyers of appliances would be a large asset of GECS. c. GE is very large and has many subsidiaries that make it difficult to classify it as just a manufacturing, retail or service company. The overall GE business is best known as a manufacturing company. It does not have its own retail stores, so it is not a retailer. While there are many services offered with its products, its primary focus is as a manufacturer. EXERCISES E6–1 a. Cash. Money held in checking accounts is defined as cash, and there are no restrictions on the account. b. Cash. Checks are considered cash unless the checks cannot be cashed until a later date (i.e., postdated). In this case, the check date has passed, so the checks are considered cash.
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