Harrys Hamburgers Ltd (HHL) is a chain of fast food restaurants A few years ago, the company decided it didnt 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 2021 HHL financial statements along with comparative amounts from 2020 are shown below (in thousands of dollars) 2021 2020 Cash $ 1,300 $ 2,900 Accounts receivable $6,000 $5,000 Less Allowance for doubtful accounts 400 5,600 500 4,500 Notes receivable 2,700 2,000 Inventory at company operated stores 1,000 1,100 Total current assets 10,600 10,500 Current liabilities 6,800 5,100 Net credit sales 60,000 50,000 Accounts receivable consist only of royalties receivable from franchisees During 2021, accounts receivable amounting to $100,000 was written off The notes receivable are from franchisees, and are due within one year During 2021, notes amounting to $1 5 million were received from new franchise operators and these are still outstanding Also during 2021, notes of $800,000 were collected in full A number of notes were dishonoured during the year, but the companys 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 Companys bank requires HHL to maintain a current ratio of 1 5 1 (Round 2) A R DR 2,000,000 1,500,000 CR 800,000 2,700,000 AFDR DR CR 100,000 500,000 400,000 If an allowance for doubtful notes was to be recorded based on your answer in Round 2, what would be the new current ratio How do you think the bank would react to this Based on the information provided, as well as your answers in the previous rounds, do you think the liquidity of HHL has improved or deteriorated in 2021 Explain

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Harrys Hamburgers Ltd. (HHL) is a chain of fast-food restaurants. A few years ago, the company decided it didnt want to own any new restaurants.

Harrys Hamburgers Ltd. (HHL) is a chain of fast-food restaurants. A few years ago, the company decided it didnt 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 2021 HHL financial statements along with comparative amounts from 2020 are shown below (in thousands of dollars):

	2021			2020
Cash		$ 1,300				$ 2,900
Accounts receivable	$6,000		$5,000
Less: Allowance for doubtful accounts	400	5,600	500		4,500
Notes receivable		2,700				2,000
Inventory at company-operated stores		1,000				1,100
Total current assets		10,600				10,500
Current liabilities		6,800				5,100
Net credit sales		60,000				50,000

Accounts receivable consist only of royalties receivable from franchisees. During 2021, accounts receivable amounting to $100,000 was written off.

The notes receivable are from franchisees, and are due within one year. During 2021, notes amounting to $1.5 million were received from new franchise operators and these are still outstanding. Also during 2021, notes of $800,000 were collected in full. A number of notes were dishonoured during the year, but the companys 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 Companys bank requires HHL to maintain a current ratio of 1.5:1.

(Round 2) A/R

2,000,000

1,500,000

800,000

2,700,000

AFDR

100,000

500,000

400,000

If an allowance for doubtful notes was to be recorded based on your answer in Round 2, what would be the new current ratio? How do you think the bank would react to this?

Based on the information provided, as well as your answers in the previous rounds, do you think the liquidity of HHL has improved or deteriorated in 2021? Explain.