Question

The Shamrock Pub provides catering services to local businesses. The following information was available for The Shamrock Pub for the years ended December 31, 2019 and 2020.

		December 31, 2019				December 31, 2020
Cash		$	2,180			$	1,680
Accounts receivable			46,500				?
Allowance for doubtful accounts			530				?
Other current assets			8,230				7,930
Current liabilities			38,300				44,700
Total credit sales			201,000				257,000
Collections on accounts receivable			193,000				230,000

Shamrock management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.

1.The cash reported at December 31, 2020, reflects the following items: petty cash $1,560 and postage stamps $120. The other current assets balance at December 31, 2020, includes the checking account balance of $3,900.

2.On November 30, 2020, Shamrock agreed to accept a 6-month, $4,940 note bearing 12% interest, payable at maturity, from a major client in settlement of a $4,940 bill. The above balances do not reflect this transaction.

3.Shamrock factored some accounts receivable at the end of 2020. It transferred accounts totaling $10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Shamrock's customers and will retain 2% of the balances. Final Factor assesses Shamrock a finance charge of 3% on this transfer. The fair value of the recourse liability is $360. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.

4.Shamrock charged off uncollectible accounts with balances of $1,570. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.

Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allowance for Doubtful Accounts at December 31, 2020. (Round answers to 0 decimal places, e.g. 125.)

Accounts receivable ending balance$

Allowance for doubtful ending balance$

Prepare the current assets section of The Shamrock Pub's balance sheet at December 31, 2020. (Round answers to 0 decimal places, e.g. 125.) and,

Compute Shamrock's current ratio and accounts receivable turnover for December 31, 2020. The accounts receivable turnover in 2019 was 4.37.

Answer 1

Working Notes:

1) Calculation of Revised Cash Balance as on December 31, 2020

Cash as on December 31, 2020 = $1,680

Add : Balance in checking account = $3,900

Less : Postage Stamps = $120

Revised Cash Balance = $5,460

2) Calculation of Revised Balance of Other Current Assets as on December 31, 2020

Balance as on December 31, 2020 = $7,930

Add: Postage Stamps = $120

Less : Balance in Bank = $3,900

Add : Due from Factor [($10,000-$360)*98%] = $9,447

Revised Other Current Assets Balance = $13,597

3) Calculation of Revised Current Liabilities Balance as on December 31, 2020

Balance as on December 31, 2020 = $44,700

Add : 12% Notes Payable = $4,940

Add : Interest payable on Note = $49 ($4,940*12%*1/12)

Add : Factoring commission payable = $300

Add : Recourse Liability = $360

Revised Current Liabilities Balance = $50,349

4) Calculation of Accounts Receivable Balance as on December 31, 2020

Balance as on December 31 2019 = $46,500

Add : Credit Sales in 2020 = $257,000

Less : Collection from Debtors = $230,000

Less : Debtors Factored = $10,000

Accounts Receivable Balance as on December 31, 2020 = $63,500

5) Provision dor Doubtful Debts = Accounts receivable balance * 2.5%

= $63,500 * 2.5%

= $1,588

6) Calculation of Allowance for Doubtful Debts as on December 31, 2020

Balance as on December 31 2019 = $530

Add : Provision made in (5) = $1,588

Less : Amount charged to P&L Account = $1,570

Allowance for Doubtful Debts as on December 31, 2020 = $548

Ans 1) Accounts Receivable Balance as on December 31, 2020 = $63,500 (Working Note - 4)

Ans 2) Allowance for Doubtful Debts as on December 31, 2020 = $548 (Woring Note - 6)

Ans 3) Current Assets Section as at December 31, 2020 is as follows:

Current Assets	Amount	Amount
Cash (Working Note - 1)		$5,460
Accounts Receivable	$63,500
Less : Provision for Doubtful Debts	$548	$62,952
Other Current Assets (Working Note -2)		$13,597
Total		$82,009

Ans 4) Current Ratio = Current Assets / Current Liabilities

Current Ratio = $82,009 / $50,349 (Current liabilities calculated in Working Note - 3)

= 1.63

Accounts Receivable Turnover ratio = Turnover / Accounts Receivable

Accounts Receivable Turnover ratio = $257,000 / $63,500

= 4.05

Accounts receivable to turnover ratio has decreased from 2019 to 2020 becaue though sales have increased, collections from debtors have not increased in the same proportion as that of sales. Also, $10,000 of the debtors have been factored. Therefore, the accounts receivable turnover ratio has come down in 2020.