Question: Accounting, Analysis, and Principles

The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron Pub for the years ended December 31, 2013 and 2014.

Flatiron 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, 2014, reflects the following items: petty cash $1,575 and postage stamps $110. The other current assets balance at December 31, 2014, includes the checking account balance of $4,000.

2. On November 30, 2014, Flatiron agreed to accept a 6-month, $5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction.

3. Flatiron factored some accounts receivable at the end of 2014. It transferred accounts totaling $10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron's customers and will retain 2% of the balances. Final Factor assesses Flatiron a finance charge of 3% on this transfer. The fair value of the recourse liability is $400. 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. Flatiron charged off uncollectible accounts with balances of $1,600. On the basis of the latest available information, the 2014 provision for bad debts is estimated to be 2.5% of accounts receivable.

Accounting: (a) Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allowance for Doubtful Accounts at December 31, 2014.

(b) Prepare the current assets section of The Flatiron Pub's balance sheet at December 31, 2014.

Analysis: (a) Compute Flatiron's current ratio and accounts receivable turnover for December 31, 2014. Use these measures to analyze Flatiron's liquidity. The accounts receivable turnover in 2013 was 4.37.

(b) Discuss how the analysis you did above of Flatiron's liquidity would be affected if Flatiron had transferred the receivables in a secured borrowing transaction.

Principles: What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables approach at December 31, 2014?