The notes receivable account consists of two notes, a $100,000 note and a $250,0

Question

The notes receivable account consists of two notes, a $100,000 note and a $250,000 note. The $100,000 note is dated October 31, 2015, with principal and interest payable on October 31, 2016. The $250,000 note is dated March 31, 2015, with principal and 10% interest payable on March 31, 2016.

During 2016, sales revenue totaled $2,070,000, $1,930,000 cash was collected from customers, and $36,000 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 8% of year-end accounts receivable.

In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Cordova’s 2016 income statement?

Cordova, Inc., reported the following receivables in its December 31, 2015, year-end balance sheet:

Explanation / Answer

Answer:

In addition to the sales revenue of $2,070,000, the 2016 income statement will include (1) interest revenue, (2) bad debts expense.

Interest revenue

250000 note: 250000*10%*3/12 = 6250

100000 note: 100000*6%*10/12 = 5000

Total interest revenue = 11250

Working note:

The interest rate on $100000 note can be determined as follows:

Interest receivable in 12/31/15 balance sheet = 19750

Less: interest on $250000 note: 250000*10%*9/12 = (18750)

Interest on $100000 note = 1000

$1000 represents interest for two months (November and December of 2015) or $500 per month. Annual interest is $500 * 12 = $6000

Interest rate = 6000/100000 = 6%

Bad debt Expense

Analysis of accounts receivable Beginning accounts receivable (47000+379000) 426000 Add: Credit sale 2070000 Less: cash collection 1930000 Less: write offs 36000 Ending accounts receivables 530000 Analysis of allowance for uncollectible accounts Beginning balance 47000 Add: bad debt expense ? Less: Write offs 36000 Ending allowance (530000*8%) 42400 Therefore, bad debt expense is (36000+42400 - 47000) 31400

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