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Capstone analytical review of Chapters 5-6. Analyzing accounts receivable, property, plant and equipment, and other related accounts (Note: Please...

Capstone analytical review of Chapters 5–6. Analyzing accounts receivable,
property, plant and equipment, and other related accounts (Note: Please refer
to Case 4.26 on pages 140–141 for the financial statement data needed for the analysis
of this case. You should also review the solution to Case 4.26 on the Web site for
this text before attempting to complete this case.)
You have been approached by Gary Gerrard, President and CEO of Gerrard Construction
Co., who would like your advice on a number of business and accounting
related matters.
Your conversation with Mr. Gerrard, which took place in February 2010, proceeded
as follows:
Mr. Gerrard: “The accounts receivable shown on the balance sheet for 2009 are
nearly $10 million and the funny thing is, we just collected a bunch of the big
accounts in early December but had to reinvest most of that money in new equipment.
At one point last year, more than $20 million of accounts were outstanding!
I had to put some pressure on our regular clients who keep falling behind. Normally,
I don’t bother with collections, but this is our main source of cash fl ows. My
daughter Anna deals with collections and she’s just too nice to people. I keep telling
her that the money is better off in our hands than in someone else’s! Can you
have a look at our books? Some of these clients are really getting on my nerves.”
Your reply: “That does seem like a big problem. I’ll look at your accounts receivable
details and get back to you with some of my ideas and maybe some questions
you can help me with. What else did you want to ask me about?”
Mr. Gerrard: “The other major problem is with our long-term asset management.
We don’t have much in the way of buildings, just this offi ce you’re sitting in and the
service garage where we keep most of the earthmoving equipment. That’s where
the expense of running this business comes in. I’ve always said that I’d rather see a
dozen guys standing around leaning against shovels than to see one piece of equipment
sit idle for even an hour of daylight! There is nothing complicated about doing
‘dirt work,’ but we’ve got one piece of equipment that would cost over $2 million to
replace at today’s prices. And that’s just it—either you spend a fortune on maintenance
or else you’re constantly in the market for the latest and greatest new ‘Cat.’ ”
Your reply: “So how can I help?”
Mr. Gerrard: “Now that you know a little about our business, I’ll have my son
Nathan show you the equipment records. He’s our business manager. We’ve got to
sell and replace some of our light-duty trucks. We need to get a handle on the value
of some of the older equipment. What the books say, and what it’s really worth, are
two different things. I’d like to know what the accounting consequences of selling
various pieces of equipment would be because I don’t want to be selling anything
at a loss.”
Your reply: “Thanks, Gary. I’ll have a chat with Anna and Nathan and get back to
After your discussion with Anna, you analyzed the accounts receivable details and
prepared the following aging schedule:
Number of Days Number of Accounts Total Amount
Outstanding Outstanding Outstanding
0–30 20 $2,240,000
31–60 9 1,600,000
61–120 6 1,320,000
121–180 4 1,080,000
180 11 3,560,000
You’ve noted that Gerrard Construction Co. has not written off any accounts receivable
as uncollectible during the past several years. The Allowance for Bad Debts account
is included in the chart of accounts but has never been used. No cash discounts have
been offered to customers, and the company does not employ a collection agency.
Reminder invoices are sent to customers with outstanding balances at the end of every
After your discussion with Nathan, you analyzed the equipment records related to
the three items that the company wishes to sell at this time:
Item Date of Accumulated Book Market
Description Purchase Cost Depreciation Value Value
1999 Ford F350 Mar 1999 $ 57,200 $ 38,600 $ 18,600 $ 14,000
2001 Cat DR9 June 2001 510,000 272,100 237,900 295,000
2003 Cat 345B L II Sept 2003 422,700 226,500 196,200 160,000
Nathan explained that Gerrard Construction Co. uses the units-of-production depreciation
method and estimates usage on the basis of hours in service for earthmoving equipment
and miles driven for all on-road vehicles. You have recalculated the annual depreciation
adjustments through December 31, 2009, and are satisfi ed that the company has made
the proper entries. The estimated market values were recently obtained through the services
of a qualifi ed, independent appraiser that you had recommended to Nathan.

What impact (increase, decrease, or no effect) would any necessary
adjustment(s) have on the company’s working capital and current ratio?
(Note that these items were computed in part g of C4.26 and do not need to
be recomputed now.)

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