Deadbeats and Slow Collections
Monahan Media's Accounts Receivable balance has been growing. Although Nick is pleased by the increase in sales, he has some concerns about cash flow.
The March 31 A/R balance ($2,800) from media services include the following accounts:
Client Amount Account Status
AR-MuskratRiders $150 Promises to pay next month
AR-WoodduckInc $750 Claims the check is in the mail
AR-DooWops& Hooligans $100 Promises to pay next week
AR-Witchy Wardrobes $450 Disconnected business phone number
AR-Dapper Diner $650 Has promised to pay since January
AR- Misty's Sodas $700 Promises to pay next week
Since Nick is unfamiliar with accounting for receivables. He's asked you to evaluate the A/R balance and make any necessary adjustments.
1 Should any of the receivables be written off? If so, which one(s) and why? If not, why not? If so, prepare the entry to write them off, using the Direct Write Off Method.
2 Industry norms suggest 4% of receivables become uncollectible. Prepare the adjusting entry needed to establish a reserve for worthless A/R, assuming the Percentage of Receivables method is used, after any worthless receivables have been written off.
3 Perform outside research to determine the kinds of questions Nick could be asking to determine whether or not to grant credit to new customers. Essentially- how should a business assess a customer's ability to pay? What other factors should be considered when accepting new business? Remember to cite your sources!
If MM needs cash more quickly than customers are paying, what else, besides hounding clients or cash only transactions, can Nick do to get cash for the business' receivables?