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8. (Recording Bad Debts) At the end of 2014, Aramis Company has accounts
receivable of $800,000 and an allowance for doubtful accounts of $40,000. On
January 16, 2015, Aramis Company determined that its receivable from Ramirez
Company of $6,000 will not be collected, and management authorized its write-off.
(a) Prepare the journal entry for Aramis Company to write off the Ramirez
receivable.
(b) What is the net realizable value of Aramis Companys accounts receivable before
the write-off of the Ramirez receivable?
(c) What is the net realizable value of Aramis Companys accounts receivable after
the write-off of the Ramirez receivable?
19. (Notes Receivable with Unrealistic Interest Rate) On December 31, 2012, Ed
Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke
was short of cash, and Abbey Co. agreed to
accept a $200,000 zero-interest-bearing note due December 31, 2014, as payment in
full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of
10%. Abbey is much more creditworthy and has various lines of credit at 6%.
(a) Prepare the journal entry to record the transaction of December 31, 2012, for the
Ed Abbey Co.
(b) Assuming Ed Abbey Co.s fiscal year-end is December 31, prepare the journal
entry for December31, 2013.
(c) Assuming Ed Abbey Co.s fiscal year-end is December 31, prepare the journal
entry for December 31, 2014.
Cash...................................................................................
200,000
Notes Receivable .................................................... 200,000
20. (Analysis of Receivables) Presented below is information for Jones Company.
1. Beginning-of-the-year Accounts Receivable balance was $15,000.
2. Net sales (all on account) for the year were $100,000. Jones does not offer cash
discounts.
3. Collections on accounts receivable during the year were $70,000.
Instructions
(a) Prepare (summary) journal entries to record the items noted above.
(b) Compute Joness accounts receivable turnover for the year. The company does
not believe it will have any bad debts.
(c) Use the turnover ratio computed in (b) to analyze Joness liquidity. The turnover
ratio last year was 6.0.
EXERCISE 7-20 (1015 minutes)
Cash...................................................................................
70,000
Accounts Receivable............................................... 70,000
Net Sales
(b) Accounts Receivable Turnover =
Average Trade Receivables (net)
(c) Jones Companys turnover ratio has declined significantly. That is, it is turning
receivables 3.33 times a year and collections on receivables took 110 days. In
the prior year, the turnover ratio was almost double (6.0) and collections took
only 61 days. This is a bad trend in liquidity. Jones should consider offering
early payment discounts and/or tightened credit and collection policies.