Log in
Finance
1
answer
4
watching
1,995
views

Vasquez Company sells office equipment and supplies to many companies in the city and surrounding area on contract terms 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. The number of customers taking full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now talking the discount. Bad debts as a percentage of gross credit sales have risen from 1.5% provided in the past years to about 4% in the current year. The controller has responded to a request for more information on the deterioration in the collections of accounts receivable with the report reproduced below. Finance Committee Report (provided by Controller) Accounts Receivable Collections May 31, 2015 The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs have been 1.5% of gross credit sales over the past five years. During the last fiscal year, this percentage increased to slightly less than 4 %. The current accounts receivable balance is $160,000. The condition of this balance in terms of age and probability of collection is as follows. Proportion of total Age categories Probability of collection 68% Not yet due 99% 15% Less than 30 days past due 96.5% 8% 30 to 60 days past due 95% 5% 61 to 120 days past due 91% 2.5% 121 to 180 days past due 70% 1.5% Over 180 days past due 20% Allowance for doubtful accounts had a credit balance of $43,000 on June 1, 2014. Vasquez Company has provided for a monthly bad debt expense accrual during the current fiscal year based on the assumption that 4% of gross credit sales will be uncollectible. Total gross credit sales for the 2014-15 fiscal year amounted to $4,000,000. Write-offs of debt accounts during the year totaled $145,000. Instructions (a) Prepare an accounts receivable aging schedule for Vasquez Company using age categories as identified in the controller’s report to the finance committee showing: 1. The amount of accounts receivable outstanding for each category and in total; 2. The estimated amount that is uncollectible for each category and in total; (b) Compute the amount of year-end adjustment necessary to bring Allowance for Doubtful Accounts to the balance indicated by the age analysis. Then, prepare the necessary journal entry to adjust the accounts records. (c) In a recessionary environment with tight credit and high interest rates: 1. Identify steps Vasquez Company might consider to improve the accounts receivable situation; 2. Then, evaluate each step identified in terms of the risk and costs involved.

Watch
1
answer
4
watching
1,995
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Avatar image
Avatar image
Liked by azzanabila144 and 1 others
Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

1) support or critique the idea that the Committee of Sponsoring Organization of the Treadway Commission (COSO) transition would strengthen internal controls over financial reporting in publicly traded companies

2) From the case study, determine the fundamental control deficiencies associated with the credit function. Next, propose at least one (1) control improvement that the credit department management could make in the process. Provide a rationale to support your response.

You have been assigned to review the internal controls of the credit department of a recently acquired subsidiary. The subsidiary imports several lines of personal computers and sells them to retail stores throughout the country. The credit department consists of a new credit manager, a clerk, and a part time secretary.

Sales are made by fifteen sales representatives: five are at company headquarters and handle large accounts with retail chains and ten are located throughout the country. Sales represesntatives visit current and prospective customers and, if a sale is made, either submit the order electronically or prepare a customer order from consisting of the original and three copies. One copy is retained by the customer, one by the sales representative, and one is sent to the warehouse; the original is sent to headquarters.

For new customers with orders of more than $100,000, a credit application is also completed and sent along with the order to headquarters. The credit application includes a bank reference and three credit references along with financial statements.

The sales order sent to headquarters goes first tot the credit department for approval. The credit department looks up the customer's credit on a computerized file that is maintained for customers with "good credit." If the customer is in the file, the clerk examines a monthly report listing all accounts that have not been paid in 60 days. If the customer is not listed in the report, the clerk initials the order as approved and sends it to accounting for recording and billing. The credit manager holds orders from new customers or from customers listed on the 60-day report for review. For transactions submitted electronically, the computer is programmed to identify all accounts that are over 60 days old and all sales that are over $100,000 to be sent to the credit manager for review.

For orders of more than $100,000 from new customers, the credit manager reviews the credit application along with the financial statements and calls at least one of the credit references. If the order is approved, the manager initials it and gives it to the secretary, who enters the approved data into the database.

If the order is denied, the manager adds the customer's name to a list of past rejected credit applications and canceled accounts. For new customers placing orders for less than the $100,000 limit, there is no further reveiw beyond the review of previously rejected credit applicants. If orders are not approved, the credit manager calls the warehouse to stop shipment. The order is marked "Credit Not Approved" and given to the secretary, who notifies the sales representative and the customer. The order and the credit application are then thrown away.

Once each quarter, the credit manager requests that the accounting department provide a list of all accounts more than 90 days old with supporting detail of account activitiy for the past 12 months. The credit manager reviews the information and determines whether action should be taken. Actions consists of the following:

1) The manager calls the sales representative and asks him or her to contact the client about payment

2) If payment is not made in three weeks, the credit manager calls the customer and requests payment. The customer is also put on the "no credit" list in the company's database.

3) If payment id not made within four additional weeks, the account is turned over to a collection agnecy.

When an account has been with a collection agency for two months without receiving payment, it is written off. The Credit manager prepares the necessary adjustitng entries.

You are doing a walk-through of the credit and collections function to get an idea of what internal controls exist and where there might be weaknesses. Then, after you finish, you or another member of the audit team will be testing the system to determine whether the internal controls actually exist and actually work as you have been told. In the meantime, keep your eyes, ears, and mind open for any weaknesses in internal control.

The department head of the credit and collections department is telling you how things work in the department. "Jenny, here, receives the mail and distributes it to the various collectors. They each open their own mail. There is a lot of correspondence going back and forth to and from customers, so it is easier if each collector just handles her own mail." It is easy for Jenny to distribute the mail because most of the letters are addressed to a specific individual.

You watch as one of the individuals opens the mail and handles the items inside. Many of the items are disputes-the customer says the items billed were not ordered, or, if ordered, were not received. Every such letter results in the disputed bill being written off. As the department head explains, the vice president of sales told him, a few years ago, that too many customers were complaining that the credit department was too tough on them, so he had decided that rather than have any more complaints, every such bill would be written off. The procedure is that the collector initiates a form, called a write-off form, to write off a particular amount from a customer's balance. In the explanation block, the collector simply writes "customer dispute." This form is signed by the collector, sent to accounting, and accounting processes the forms each Wednesday. There are so many letters with so many disputes that the department has a monthly competition for the most unusual letters, which are tacked up on a bulletin board. All the rest of the dispute letters are thrown away as soon as the collector has filled out the write-off form.

Collectors also receive checks in the mail. These are payments from customers whose accounts are wholly or partly overdue. As one of the collectors explains, they each receive a print-out once a month, so if the customer sends in a payment, there is no way for the collector to find out about it before the next month's print-out arrives unless the collector receives the payment. Most of the collectors process dozens of payments each month. They make whatever notations they need on the monthly print-out, prepare a deposit ticket, send the department's runner to the bank each Friday (collections are accumulated until Friday, with the customers' payments being held in an otherwise empty desk drawer until then), and send the receipted deposit ticket on to the department which records collections of cash. The credit and collections department also sends a listing of which customers to credit for having paid all or part of their balances.

Near the end of each fiscal quarter, the corporate controller gets a preliminary set of financial statements, and then he tells the department head by telephone how much the department is allowed to write off in bad debts. Thus, the company writes off bad debts only in the third month of each fiscal quarter. "Why does he tell you by telephone?" you ask of the credit and collections manager. "He doesn't want any written record of it," is the reply.

You are interested in how the department decides which customer balances to write off as uncollectible and which to leave on the books. "We write off the oldest ones, up to the amount of what we have been told we can write off," says the credit and collections manager. "That way, our percentage of bad debts always comes out pretty much in line with what we have done before, and the auditors have always been satisfied with it. They had read some academic articles from some people who recommended using time-series analysis to see if the numbers were correct, so they test the accounts receivable account and satisfy themselves that the sales and receivables are real, but they always test the write-offs and bad debts expense simply by using the time-series analysis recommended by the accountants with those fancy doctorates. Go ask the guy who ran the audit last year."

You inspect the process by which customer payments are received the regular way, which is done in a different department. The company has a special Post Office box set up. Twice a day, some one person from maintenance goes to the Post Office to pick up the mail, including the customer payments received at this special Post Office box. It is not always the same person from maintenance who goes to the Post Office; whoever is available when the department head looks around is typically the one who is sent.

When the person returns from the Post Office, he brings a bunch of mail to the cash receipts department, where the mail is opened and customers' checks are paperclipped to the envelopes they came in. One of the goals of the cash receipts department is to get the customer payments deposited promptly, so after all the checks are paper-clipped, someone from the department goes to the bank, fills out a whole bunch of deposit slips, deposits those checks, and comes back to the department with those receipted deposit slips. Then the department members try to figure out which customer paid which amounts. They are helped by the routing number on the checks, but those routing numbers represent banks, not customers, and multiple customers use the same banks. Consequently, they refer to a listing of routing numbers to identify the banks, then to a listing of banks to see which customers use those banks, and then to another copy of the same monthly print-out used in credit and collections to figure out which of the customers who use that bank must have paid that particular amount. If they cannot make a good guess, they call some of the customers to ask if they are the ones who paid the amount. Once they think they know who paid the amount, they generate a journal entry to debit cash and credit the customer's account; the credit to the customer's account is automatically also a credit to accounts receivable. Since they have a copy of the monthly printout of accounts receivable, when a customer's payment is not for the full amount of an invoice, they just go ahead and adjust that customer's account so the full amount of the invoice is taken off the customer's account. They say they are creating a lot of goodwill with customers that way.

a. What internal control weaknesses do you see in this system?

b. What are the potential effects of these weaknesses?

c. What do you recommend instead (that is, if you have such a recommendation)?

Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
January (actual) 21,800 June (budget) 51,800
February (actual) 27,800 July (budget) 31,800
March (actual) 41,800 August (budget) 29,800
April (budget) 66,800 September (budget) 26,800
May (budget) 101,800

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.9 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions 4% of sales
Fixed:
Advertising $ 290,000
Rent $ 27,000
Salaries $ 124,000
Utilities $ 11,500
Insurance $ 3,900
Depreciation $ 23,000
Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
Assets
Cash $ 83,000
Accounts receivable ($41,700 February sales; $501,600 March sales) 543,300
Inventory 130,928
Prepaid insurance 25,500
Property and equipment (net) 1,040,000
Total assets $ 1,822,728
Liabilities and Stockholders’ Equity
Accounts payable $ 109,000
Dividends payable 21,750
Common stock 980,000
Retained earnings 711,978
Total liabilities and stockholders’ equity $ 1,822,728

The company maintains a minimum cash balance of $59,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $59,000 in cash.
Required:
1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
a. A sales budget, by month and in total.

b. A schedule of expected cash collections from sales, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)

d.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2.

A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

3.

A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in