1. Explain the nature of accounts receivable. 2. Manage accounts receivable. 3. Describe components of a collection system. 4. Discuss the nature of risk measurement. 5. Analyze transactions and accounts. You are an accountant for RUIZ AND TRAN DEPARTMENT STORE. The department store has to create a strategy to address its store credit card operation and improve its credit rating. RUIZ AND TRAN DEPARTMENT STORE dramatically increased sales by offering a store credit card. Credit card customers receive additional rewards when they first open an account and frequently throughout the year. Five years after introducing the RUIZ AND TRAN credit card, the store has 7,800 credit card customers with a total outstanding balance of $4,200,000. Unfortunately, not all credit card customers have turned out to be reliable. Currently, 10% of the credit customers have accounts that are 60 days or more overdue. The department store charges an annual percentage rate of 21% for credit card purchases. One of the owners of RUIZ AND TRAN DEPARTMENT STORE (judge) is concerned about the number of customers who are past due on their credit card payments. The owner has become increasingly concerned since the store will be applying for a $3 million loan to build a second location. Most banks have indicated a concern with the number of credit card customers who are not making minimum payments on their accounts. YOUR CHALLENGE You are to outline a plan to improve the collection of payments from your credit card customers and outline a strategy for the store to improve its credit rating in order to obtain a loan. RUIZ AND TRAN DEPARTMENT STORE Schedule of Credit Card Payments 7,800 Store Credit Card Customers $4.2 Million of Credit Card Charges Credit Card Customer Category Pay on Time 1-30 days overdue 31-60 days overdue Uncollectible Accounts ($210,000) % of Credit Card Customers Who Pay on Time 70% 15% 10% # of Credit Card Customers Who Pay on Time 5,460 1,170 780 390 5% RUIZ AND TRAN DEPARTMENT STORE Partial Balance Sheet Assets $4,600,000.00 Land and Building Store Displays and Furniture Less Depreciation $600,000.00 $120,000.00 $ 480,000.00 Inventory Accounts Receivable Other Assets $1,200,000.00 $4,200,000.00 $1,400,000.00 Total Assets $11,880,000.00 Liabilities Accounts Payable Mortgage Uncollectible Accounts Receivable $3,800,000.00 $2,600,000.00 $ 210,000.00 Total Liabilities $6,610,000.00 Net Worth/Owner's Equity $5,270,000.00