Tricia Fenton, vice president of operations for Billings National Bank, has instructed the bank’s
computer programmer to use a 365-day year to compute interest on depository accounts
(payables). Tricia also instructed the programmer to use a 360-day year to compute interest on
loans (receivables).
Discuss whether Tricia is behaving in a professional manner.The following is an excerpt from a conversation between the office manager, Jamie Luthi, and
the president of Jefferson Construction Supplies Co., David King. Jefferson sells building sup-
plies to local contractors.Jamie:David, we’re going to have to do something about these overdue accounts receivable.
One-third of our accounts are over 60 days past due, and I’ve had accounts that have
stayed open for almost a year!
David:I didn’t realize it was that bad. Any ideas?
Jamie:Well, we could stop giving credit. Make everyone pay with cash or a credit card. We ac-
cept MasterCard and Visa already, but only the walk-in customers use them. Almost all
of the contractors put purchases on their bills.
David:Yes, but we’ve been allowing credit for years. As far as I know, all of our competitors
allow contractors credit. If we stopped giving credit, we’d lose many of our contractors.
They’d just go elsewhere. You know, some of these guys run up bills as high as $40,000
or $60,000. There’s no way they could put that kind of money on a credit card.
Jamie:That’s a good point. But we’ve got to do something.
David:How many of the contractor accounts do you actually end up writing off as
uncollectible?
Jamie:Not many. Almost all eventually pay. It’s just that they take so long!Suggest one or more solutions to Jefferson’s problem concerning the collection of accounts
receivable.The following is an excerpt from a conversation between Kay Kinder, the president and owner
of Retriever Wholesale Co., and Michele Stephens, Retriever’s controller. The conversation took
place on January 4, 2007 shortly after Michele began preparing the financial statements for the
year ending December 31, 2006.Michele:Kay, I’ve completed my analysis of the collectibility of our accounts receivable. My
staff and I estimate that the allowance for doubtful accounts should be somewhere be-
tween $60,000 and $90,000. Right now, the balance of the allowance account is $18,000.
Kay:Oh, no! We are already below the estimated earnings projection I gave the bank last year.
We used that as a basis for convincing the bank to loan us $100,000. They’re going to be
upset! Is there any way we can increase the allowance without the adjustment increasing
expenses?
Michele:I’m afraid not. The allowance can only be increased by debiting the bad debt expense
account.
Kay:Well, I guess we’re stuck. The bank will just have to live with it. But let’s increase the al-
lowance by only $42,000. That gets us into our range of estimates with the minimum ex-
pense increase.
Michele:Kay, there is one more thing we need to discuss.
Kay:What now?
Michele:Jill, my staff accountant, noticed that you haven’t made any payments on your receiv-
able for over a year. Also, it has increased from $20,000 last year to $80,000. Jill thinks we
ought to reclassify it as a noncurrent asset and report it as an “other receivable.”
Kay:What’s the problem? Didn’t we just include it in accounts receivable last year?
Michele:Yes, but last year it was immaterial.
Kay:Look, I’ll make a $60,000 payment next week. So let’s report it as we did last year.If you were Michele, how would you address Kay’s suggestions?394 Chapter 8 Receivables
BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES
Activity 8-1
Ethics and professional
conduct in businessActivity 8-2
Collecting accounts
receivableActivity 8-3
Value of receivables