Question

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

		December 31, 2019				December 31, 2020
Cash		$	1,870			$	1,720
Accounts receivable			45,800				?
Allowance for doubtful accounts			570				?
Other current assets			8,540				7,950
Current liabilities			37,900				44,700
Total credit sales			205,000				254,000
Collections on accounts receivable			191,000				230,000

Coronado 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 $1,600 and postage stamps $120. The other current assets balance at December 31, 2020, includes the checking account balance of $4,130.
2.		On November 30, 2020, Coronado agreed to accept a 6-month, $5,130 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,130 bill. The above balances do not reflect this transaction.
3.		Coronado 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 Coronado’s customers and will retain 2% of the balances. Final Factor assesses Coronado a finance charge of 3% on this transfer. The fair value of the recourse liability is $390. 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.		Coronado charged off uncollectible accounts with balances of $1,540. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.

Compute Coronado’s current ratio and accounts receivable turnover for December 31, 2020. The accounts receivable turnover in 2019 was 4.37. (Round answers to 2 decimal places, e.g. 52.75.)

Current ratio			? :1
Accounts receivable turnover			? times

Answer 1

Compute current ratio and accounts receivable turnover ratio as follows

Current ratio                                        = Current Assets ÷ Current Liabilities

                                                            = $71,855 ÷ $45,090

                                                            = 1.59 : 1

Accounts Receivable Turnover           = Credit Sales ÷ Average Accounts Receivable

                                                            = $254,000 ÷ (($45,230 + $56,803.50) ÷ 2)

                                                            = 4.98 times

Notes:

Compute ending balance of accounts receivable as follows

Accounts Receivable:
Beginning balance	$45,800
Credit sales during 2020	$254,000
Cash collected during 2020	($230,000)
Written off	($1,540)
Receivables factored	($10,000)
Ending balance	$58,260

Compute ending balance of allowance for doubtful accounts

Allowance for Doubtful Accounts:
Beginning balance	$570
Written off	($1,540)
Bad debt expense	$2,426.50
Ending Balance ($58,260 × 2.5%)	$1,456.50

Compute current assets as follows

Current Assets
Cash ($1600 + $4,130)	$5,730
Accounts Receivable, net ($58,260 − $1,456.50)	$56,803.50
Interest Receivable ($5,130 × 12%) ÷ 12	$51.30
Due from factor ($10,000 × 2%)	$200
Note Receivable	$5,130
Postage Stamps	$120
Other current assets ($7,950 − $4,130)	$3,820
Total current assets	$71,855

Compute total current liabilities as follows

Current Liabilities ($44,700 + $390)

$45,090