Question 1:
GAAP and Notes Receivable
Arabian Realty has the following note receivable transactions. Write the journal entry required for each transaction.
Use a 365-day year for interest computations, and round interest amounts to the nearest dollar. Arabian Realty has an October 31 fiscal year-end.
a. Aug 1. Loaned $ 10,000 cash to Candace Smith on a one-year, 7% note
b. Oct 6. Performed service for Putt Pro, receiving a 90-day, 6% note for $ 15,000.
Hint: Note this transaction involves performing a service that results in a note receivable.
c. Oct 16. Received a $ 2,000, six month, 11% note on account from Vernon, Inc.
Hint: Note this transaction involves converting an account receivable to a note receivable.
d. Oct 31. Accrued interest revenue for the year.
Hint: For each note receivable, count how many days the note has been in effect at October 31, and calculate the amount of interest revenue accrued at October 31. Add up the interest accrued on each note to obtain the total interest revenue for the year (assuming these are the only notes receivable outstanding).
e. How much interest revenue did Arabian earn this year?
Question 2:
Algonquin, Inc., reported the following items at December 31, 2012, and 2011:
Balance Sheets (Summarized)
1a. Compute Algonquin's quick (acid-test) ratio. Is this ratio strong or weak?
1b. Compute days' sales in receivables for 2012. Is this ratio strong or weak? Algonquin sells on terms of net 30 days.
2. Recommend two ways for Algonquin to speed up its cash flow from receivables.