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Uncollectible Accounts and Ratio Calculation

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Chapter 8: Questions 3 and 4
3. What are the essential features of the allowance method of accounting for bad debts?
4 Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren.
Chapter 8: Exercise E8-5
E8-5 Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts. Prepare entries for recognizing accounts receivable.

Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500

Chapter 9: Exercise E9.9
E9-9 Optix International is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company's current offerings, but offer a complementary fit to its existing product line. Frank Renolds, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Carol Fischer, the company's CFO, has provided the following projections based on results with and without the new products.
Without New Products With New Products
Sales $10,000,000 $18,000,000
Net income $800,000 $1,800,000
Average total assets $5,000,000 $15,000,000
Instructions
(a) Compute the company's return on assets ratio, profit margin ratio, and asset turnover ratio, both with and without the new product line.
(b) Discuss the implications that your findings in part (a) have for the company's decision.

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Solution Summary

The solution explains various calculations relating to uncollectible accounts and calculation of some ratios

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Dealing With Financials - The Bonnie and Clyde Company

At year end, Bonnie Company has accounts receivable of $112,000. The allowance for uncollectible accounts has a balance prior to adjustment of $(400). In other words, there were fewer specific write-offs than estimated, leaving an excess in the allowance account. Net credit sales for the year were $315,000 and 3% is estimated to be uncollectible.

At year end, Clyde Company has accounts receivable of $220,000. The allowance for uncollectible accounts has a balance prior to adjustment of $200. In other words, more specific accounts were written off than estimated, so the allowance was short by $200. Net credit sales for the year were $1,525,000 and 1% is estimated to be collectible.

For each situation compute the following:

1. The bad debts expense for the year
2. The balance in the allowance for uncollectible accounts account at year end
3. The net realizable value of accounts receivable at year end
4. Assuming Bonnie Company had an accounts receivable (net) balance of $105,000 at the beginning of the year, what is Bonnie's accounts receivable turnover ratio for the year?
5. Assuming Clyde company had an accounts receivable (net) balance of $226,000 at the beginning of the year, what is Clydes accounts receivable turnover ratio for the year?

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