',32

Part

Finunc'iul Ac'ctnmting

Cases

Case 5-1

Stern eorporation

(A)*

On December 31, 20A6, before the yearly financial

statements were prepared, the controller of the Stern

were circulating that the trustee in bankruptcy for

the Hollowell Company would pay all obligations

Corporation reviewed certain transactions that affected

accounts receivable and the allowance for doubtful accounts. The controller first exarnined the December 31,
2005, balance sheet (E,xhibit I on page 133). A subsequent review of the year's transactions applicable to accounts receivable revealed the items listed below:

100 cents on the dollar.

I. Sales on

account during 2006 amounted to

5. The Allowance for Bad Debts was adjusted to equal

3 percent of the balance in Accounts Receivable
the end of the year.

Questions

s9,965 ,5J 5.

2. Payment received on accounts receivable during

2006 totaled $9.6 85.420.

3. During the year, accounts receivable totaling

$26.854 were deerned uncollectible and were written

off.

4. TWo accounts that had been written off as uncollectible in 2005 were collected in 20A6. One account for $2,108 was paid in full. A partial payment
of $ 1 ,566 was rnade by the Hollowell Corxpany on
another accollltt that originerlly had attnounted to
$2,486. The controller was reasotlably sllre this account would be paid irr full because reliable reports
* Copyright O lames S. Reece.

at

Analyze the effect of each of these transactions

tn

of its effect on Accounts

Receivable, Al'
lowance for Doubtful Accounts., and any other account that ntay be involved, and prepare necessary

terms

journal entries.

2. Give the correct totals for Accounts Receivable and

the Allowance for Doubtful Accounts as of Decem-

ber

3I,

2006, after the transactions affecting

them

had been recorded.

3. Calculate the current ratio, acid-test ratio, and days'

receivables figures as of December 3 l, 2006. Assunte that atnounts for iterns other than those de'
scribed in the case are the san-le AS on December

31,

2005.

Case 5-2

Grennell Farm{'
E,arly in 2006, Detrise Grey was notifiecl by o lawyer
that lter recently deceased uncle had willed her the
ownership of a 2,000-acre wheat farm in Iowa. The
lawyer asked whether Grey wanted to keep the farm or

sell it.

Grey was an assistatlt vice president in the consulrrer credit department of a large New York bank.
Despite the distance between New York and Iowa,
* Copyright

o by the President and Fellows of Harvard

College. Harvard Business School case 198-046.

Grey was interested in retaining ownership of the

farm if she could determine its profitability. During
the last l0 years of his life, Jeremiah Grennell had
hired professional managers to run his farm while he
remained in semiretirement in Irlorida.
Keeping the farm as an investment was particularly
interesting to Grey for the following reasons:

1. Recent grain deals

with foreign

countries

had

begun to increase present farm commodity prices,

and many experts believed these prices would re'
main high for the next several years.