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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 referto Case 4.26 on pages 140–141 for the financial statement data needed for the analysisof this case. You should also review the solution to Case 4.26 on the Web site forthis text before attempting to complete this case.)You have been approached by Gary Gerrard, President and CEO of Gerrard ConstructionCo., who would like your advice on a number of business and accountingrelated matters.Your conversation with Mr. Gerrard, which took place in February 2010, proceededas follows:Mr. Gerrard: “The accounts receivable shown on the balance sheet for 2009 arenearly $10 million and the funny thing is, we just collected a bunch of the bigaccounts 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. Mydaughter Anna deals with collections and she’s just too nice to people. I keep tellingher that the money is better off in our hands than in someone else’s! Can youhave 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 receivabledetails and get back to you with some of my ideas and maybe some questionsyou 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 theservice garage where we keep most of the earthmoving equipment. That’s wherethe expense of running this business comes in. I’ve always said that I’d rather see adozen guys standing around leaning against shovels than to see one piece of equipmentsit 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 toreplace at today’s prices. And that’s just it—either you spend a fortune on maintenanceor 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 sonNathan show you the equipment records. He’s our business manager. We’ve got tosell and replace some of our light-duty trucks. We need to get a handle on the valueof some of the older equipment. What the books say, and what it’s really worth, aretwo different things. I’d like to know what the accounting consequences of sellingvarious pieces of equipment would be because I don’t want to be selling anythingat a loss.”Your reply: “Thanks, Gary. I’ll have a chat with Anna and Nathan and get back toyou.”After your discussion with Anna, you analyzed the accounts receivable details andprepared the following aging schedule:Number of Days Number of Accounts Total AmountOutstanding Outstanding Outstanding0–30 20 $2,240,00031–60 9 1,600,00061–120 6 1,320,000121–180 4 1,080,000180 11 3,560,000You’ve noted that Gerrard Construction Co. has not written off any accounts receivableas uncollectible during the past several years. The Allowance for Bad Debts accountis included in the chart of accounts but has never been used. No cash discounts havebeen 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 everyquarter.After your discussion with Nathan, you analyzed the equipment records related tothe three items that the company wishes to sell at this time:EstimatedItem Date of Accumulated Book MarketDescription Purchase Cost Depreciation Value Value1999 Ford F350 Mar 1999 $ 57,200 $ 38,600 $ 18,600 $ 14,0002001 Cat DR9 June 2001 510,000 272,100 237,900 295,0002003 Cat 345B L II Sept 2003 422,700 226,500 196,200 160,000Nathan explained that Gerrard Construction Co. uses the units-of-production depreciationmethod and estimates usage on the basis of hours in service for earthmoving equipmentand miles driven for all on-road vehicles. You have recalculated the annual depreciationadjustments through December 31, 2009, and are satisfi ed that the company has madethe proper entries. The estimated market values were recently obtained through the servicesof a qualifi ed, independent appraiser that you had recommended to Nathan.Required:What impact (increase, decrease, or no effect) would any necessaryadjustment(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 tobe recomputed now.)
