Harry's Hamburgers Ltd. (HHL) is a chain of fast-food restaurants. A few years ago, the company decided it didn't want to own any new restaurants. Rather, when a new restaurant opened up, it is owned by a franchisee rather than the company. A franchisee is an individual investor who owns the land, building, furniture, and other assets and operates the restaurant. In return, the franchisee pays HHL a royalty fee, based on a percentage of sales, for the right to use the HHL name and products under a franchise agreement. If the franchisee needs funds to help build the restaurant, they can borrow money from HHL for a one-year period by signing a note receivable to HHL.
Selected items from the 2015 HHL financial statements along with comparative amounts from 2014 are shown below (in thousands of dollars):

Accounts receivable consist only of royalties receivable from franchisees. During 2015, accounts receivable amounting to $100,000 were written off.
The notes receivable are from franchisees, and are due within one year. During 2015, notes amounting to $1.5 million were received from new franchise operators and these are still outstanding. Also during 2015, notes of $800,000 were collected in full. A number of notes were dishonoured during the year, but the company's new vice-president of finance believes that all of these are recoverable, so no allowance for doubtful notes was set up. In the past, no dishonoured note has ever been collected.
The company's bank requires HHL to maintain a current ratio of 1.5:1.
Instructions
(a) Based on the above information, calculate the company's current ratio for 2015 and 2014. Does it currently meet the bank's requirement? (b) Reconstruct the Allowance for Doubtful Accounts and Notes Receivable accounts.
(c) Do you believe the allowance is adequate for accounts receivable? Explain.
(d) Do you think that an allowance should be recorded for notes receivable? Why or why not? If you believe that an allowance should be set up, what amount should be recorded? (Hint: Calculate the amount of dishonoured notes).
(e) If an allowance for the doubtful notes was to be recorded based on your answer to (d), recalculate the company's 2015 current ratio. How do you think the bank would react to this?
(f) Based on a review of the information provided above, do you think that the liquidity of HHL has improved or deteriorated in 2015?

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2015 2014 Cash Accounts recetvable Allowance for doubtful accounts Notes recelvable Inventory at company-operated stores Total current assets Current liabilities Net credit sales 1,300 6,000 (400) 2,700 1,000 10,600 6,800 60,000 s2,900 5,000 (An) 2,000 1,100 10,500 5,100 50,000