Capstone analytical review of Chapters 56. Analyzing accounts receivable, property, plant, and equipment, and other related accounts (Note: Please refer to Case 4.32 on pages 135136 for the financial statement data needed for the analysis of this case. You should also review the solution to Case 4.32, provided by your instructor, before attempting to complete this case.)

You have been approached by Gary Gerrard, president and CEO of Gerrard Construction Co., who would like your advice on a number of business and accounting related matters.

Your conversation with Mr. Gerrard, which took place in February 2023, proceeded as follows:

Mr. Gerrard: The accounts receivable shown on the balance sheet for 2022 are nearly $30 million and the funny thing is, we just collected a bunch of the big accounts in early December but had to reinvest most of that money in new equipment. At one point last year, more than $60 million of accounts were outstanding! I had to put some pressure on our regular clients who keep falling behind. Normally, I dont bother with collections, but this is our main source of cash flows. My daughter Anna deals with collections and shes just too nice to people. I keep telling her that the money is better off in our hands than in someone elses! Can you have a look at our books? Some of these clients are really getting on my nerves.

Your reply: That does seem like a big problem. Ill look at your accounts receivable details and get back to you with some of my ideas and maybe some questions you 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 dont have much in the way of buildings, just this office youre sitting in and the service garage where we keep most of the earthmoving equipment. Thats where the expense of running this business comes in. Ive always said that Id rather see a dozen guys standing around leaning against shovels than to see one piece of equipment sit idle for even an hour of daylight! There is nothing complicated about doing dirt work, but weve got one piece of equipment that would cost over $3 million to replace at todays prices. And thats just iteither you spend a fortune on maintenance or else youre 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, Ill have my son Nathan show you the equipment records. Hes our business manager. Weve got to sell and replace some of our light-duty trucks. We need to get a handle on the value of some of the older equipment. What the books say, and what its really worth, are two different things. Id like to know what the accounting consequences of selling various pieces of equipment would be because I dont want to be selling anything at a loss.

Your reply: Thanks, Gary. Ill have a chat with Anna and Nathan and get back to you.

After your discussion with Anna, you analyzed the accounts receivable details and prepared the following aging schedule:

Youve noted that Gerrard Construction Co. has not written off any accounts receivable as uncollectible during the past several years. The Allowance for Bad Debts account is included in the chart of accounts but has never been used. No cash discounts have been 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 every quarter.

After your discussion with Nathan, you analyzed the equipment records related to the three items that the company wants to sell at this time:

Nathan explained that Gerrard Construction Co. uses the units-of-production depreciation method and estimates usage on the basis of hours in service for earthmoving equipment and miles driven for all on-road vehicles. You have recalculated the annual depreciation adjustments through December 31, 2022, and are satisfied that the company has made the proper entries. The estimated market values were recently obtained through the services of a qualified, independent appraiser whom you had recommended to Nathan.

Required:

a. Explain what Mr. Gerrard meant when he said, I keep telling her that the money is better off in our hands than in someone elses!

b. What is your overall reaction concerning Gerrard Construction Co.s management of accounts receivable? What suggestions would you make to Mr. Gerrard that may prove helpful in the collection process?

c. What accounting advice would you give concerning the accounts receivable balance of $29,400,000 at December 31, 2022?

d. What impact (increase, decrease, or no effect) would any necessary adjustment(s) have on the companys working capital and current ratio? (Note that these items were computed in part g of Case 4.32 and do not need to be recomputed now.)

e. Explain what Mr. Gerrard meant when he said, We need to get a handle on the value of some of the older equipment. What the books say, and what its really worth, are two different things.

f. Use the horizontal model, or write the journal entries, to show the effect of selling each of the three assets for their respective estimated market values. Partial-year depreciation adjustments for 2023 can be ignored.

g. Explain to Mr. Gerrard why his statement I dont want to be selling anything at a loss does not make economic sense.

\begin{tabular}{lll} \hline NumberofDaysOutstanding & NumberofAccountsOutstanding & TotalAmountOutstanding \\ 030 & 20 & $6,720,000 \\ 3160 & 9 & 4,800,000 \\ 61120 & 6 & 3,960,000 \\ 121180 & 4 & 3,240,000 \\ >180 & 11 & 10,680,000 \\ \hline \end{tabular} \begin{tabular}{lcccccc} \hline \multicolumn{1}{c}{ Item } & & & & & \multicolumn{2}{c}{ Estimated } \\ Description & DateofPurchase & Cost & AccumulatedDepreciation & BookValue & MarketValue \\ 2015 Ford F550 & Mar 2015 & $114,400 & $77,200 & $37,200 & $28,000 \\ 2011 Cat D11R dozer & June 2014 & 1,020,000 & 544,200 & 475,800 & 590,000 \\ 2012 Cat 631G scraper & Sept 2016 & 845,400 & 453,000 & 392,400 & 320,000 \\ \hline \end{tabular}