Question

Dog, inc., reported the following receivable in its December 31, 2020, year-end balance sheet:

Current assets:

Accounts receivable, net of 53,000 in allowance for uncollectibe accounts. $385,000

Interest receivable $19,700

Notes receivable $420,000

Additional information:

1. The notes receivable account consists of two notes: a $110,000 note and a $310,000 note. The $110,000 note is dated October 31, 2020, with principal and interest payable on October 31, 2021. The $ 310,000 note is dated March 31, 2020, with principal and 8% interest payable on March 31, 2020. Determine the interest rate for the $110,000 note first.

2. During 2021, sale revenue totaled $2,130,000, $1,990,000 cash was collected from customers, and $42,000 in accounts receivable were written off. All sales are made on a credit basis. Bad debt expense is recorded at year-end by adjusting the allowance account to an amount equal to 9% of year-end gross accounts receivable. (use t accounts)

Required:

1. Calculate the interest revenue and bad debt expense amounts that will appear in Dog's inc. 2021 income statement?

2. Calculate the receivable turnover ratio for 2021 (Round to the 2 decimal places)

Answer 1

Requirement 1 a)

Total Interest receivable	19,700
Less: Interest receivable on 8% Note (310,000 x 8%) x 9/12	(18,600)
Interest Receivable on 110,000 Note for 10 months	1,100

Interest Rate on 110,000 Note

110,000 x Interest x 2/12 = 1,100 Interest = (1,100 x 6) / 110,000 = 6%

Interest Revenue:

Interest Revenue on 6% Note	Interest Revenue on 8% Note
= 110,000 x 6% x 10/12 = 5,500	= 310,000 x 8% x 3/12 = 6,200

Total Interest Revenue: $11,700

.

Requirement 1 b)

Beginning Accounts Receivable (gross) (385,000 + 53,000)	438,000
Add: Sales	2,130,000
Less: Collection	(1,990,000)
Less: Written off from Allowance for uncollectible accounts	(42,000)
Ending Accounts receivables (gross)	536,000

Ending Accounts receivables (gross)	536,000
Bad Debt Expense (9% of 536,000)	48,240
Less: Balance in Allowance for uncollectible accounts (53,000 - 42,000)	(11,000)
Bad Debt Expense for the year	37,240

.

Requirement 2)

Accounts receivable turnover ratio:

= Sales / Average Accounts receivables

= 2,130,000 / (438,000 + 536,000) / 2

= 4.38