Cordova, Inc., reported the following receivables in its December 31, 2015, year
ID: 2480851 • Letter: C
Question
Cordova, Inc., reported the following receivables in its December 31, 2015, year-end balance sheet:
Current assets:
Accounts receivable, net of $56,000 in allowance for uncollectible accounts 388,000
Interest receivable 21,500
Notes receivable 450,000
Additional information:
1. The notes receivable account consists of two notes, a $110,000 note and a $340,000 note. The $110,000 note is dated October 31, 2015, with principal and interest payable on October 31, 2016. The $340,000 note is dated March 31, 2015, with principal and 8% interest payable on March 31, 2016.
2. During 2016, sales revenue totaled $2,160,000, $2,020,000 cash was collected from customers, and $45,000 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 accounts receivable.
1. In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Cordova’s 2016 income statement?
Explanation / Answer
In Addition to the sales revenue of $2,160,000 the 2016 income statement will also include interest revenue and bad debt exp.
The Interest rate on $110,000 note:
Interest receivable on 31/12/2015 : $21,500
Less interest on$340,000 note : $340,000*8%*9/12 : ($20,400)
Interest on $110,000 : $1,100
$1,100 interest is for two months, $550 per month therefore annual interest = $550*12 = $6,600
Interest rate = $6,600 / $110,000 = 6%
Bad debt exp
Beginning Allowances = $56,000
Bad debts W/O = $45,000
Ending Allowances = (539,000 * 9%) = $48,510
Therefore bad debt expenses ($56,000 -45,000 - 48,510) = $37,510
Interest Revenue $340,000 Note ($340,000 * 8% * 3/12) $6,800 $110,000 note ($110,000 6% * 10/12) $5,500 Total Interest revenue $12,300