pratt_8e_chapter_6_solns - CHAPTER 6 THE CURRENT ASSET...

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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 2009 Total Accounts Receivable = $3,623 + $93 2009 Total Accounts Receivable = $3,716 2009 Uncollectibles as a Percentage of Total Accounts Receivable = $93/$3,716 = 2.50% 2008 Total Accounts Receivable = $4,618 + $90 2008 Total Accounts Receivable = $4,708 2008 Uncollectibles as a Percentage of Total Accounts Receivable = $90/$4,708 = 1.91% Therefore, the percentage increased. b. Since Emerson Electric is using the percentage of accounts receivable method (balance sheet approach), bad debt expense for 2009 would be the amount needed to adjust the allowance for doubtful accounts to $93. 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. 2007: Ending Allowance Balance = Beginning Allowance Balance + Bad Debt Charge – Write-Offs + Recoveries $4,238 = $3,945 + 4,431 $5,966 + 1,828 Bad Debt Expense for 2007 = $4,431 2008: Ending Allowance Balance = Beginning Allowance Balance + Bad Debt Charge – Write-Offs + Recoveries $5,325 = $4,238 + 7,518 $8,162 + 1,731 Bad Debt Expense for 2008 = $7,518 As the economy went into recession in 2008, companies that extend credit (such as GE’s capital division) had a more difficult time collecting receivables. 1
b. 2007: $5,966 write-offs; $4,138 write-offs, net of recoveries 2008: $8,162 write-offs; $6,431 write-offs, net of recoveries c. The allowance account grew by 25.7% (($5,325- $4,238)/$4,238) from 2007 to 2008. The allowance account grew at such a large rate due to the deterioration of the economy and GE’s belief that a greater amount future receivables will prove to be uncollectible as a result. By increasing the allowance balance the company is taking into consideration that receivables will not be as collectible as when the economy was healthier. Increasing the allowance lowers the “net realizable value” of the receivables on the balance sheet, which is prudent behavior given the economic climate. BE6–3 a. GE bad debts as a percentage of total revenues = $7.5/$182 = 4.1%; as a percentage of GECS revenues, the calculation is $7.5/$71 = 10.6%. 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. Services, primarily financial services, are becoming more important for the consolidated operation. 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.,

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