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Chapter 7: 5CA_b (page 377)

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment鈥檚 list price. Each note鈥檚 stated interest rate is below the customer鈥檚 market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

How should Corrs account for the sale, without recourse, of a February 1, 2017, note receivable sold on May 1, 2017? Why is it appropriate to account for it in this way?

Short Answer

Expert verified

Carrying value must be added with the effective interest revenue, and the business entity must recognize gain or loss on the sale of receivables.

Step by step solution

01

Definition of Face Value

The value stated on the financial instrument or financial security is known as face value. It might differ from the value at which the instrument or security is issued.

02

Accounting for Sale Without 91影视

The carrying value of the note receivable must be increased by adding the amount of effective interest revenue for the period starting from 1 February 2017 to 1 May 2017. On the sale of receivables without resources, the business entity must increase the cash amount by eliminating the carrying value and recognizing gain or loss equal to the difference between the carrying value and the amount received.

This reporting is appropriate because the note receivable is initially reported at its carrying value. When sold without resources, the business entity must report for gain or loss.

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Most popular questions from this chapter

Under IFRS, receivables are to be reported on the balance sheet at:

(a) amortized cost.

(b) amortized cost adjusted for estimated loss provisions.

(c) historical cost.

(d) replacement cost.

On January 1, 2017, Lombard Co. sells property for which it had paid \(690,000 to Sargent Company, receiving in return Sargent鈥檚 zero-interest-bearing note for \)1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?

Explain how accounting for bad debts can be used for earnings management.

Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require 鈥渞ecourse鈥� on the sold receivables. Explain to the controller of Moon Hardware what 鈥渞ecourse鈥� is and how the recourse will be reflected in Moon鈥檚 financial statements after the sale of the receivables.

(Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.

Instructions

(a) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costs involved.

(b) Should the controller be concerned with Marvin Company鈥檚 growth rate in estimating the allowance? Explain your answer.

(c) Does the president鈥檚 request pose an ethical dilemma for the controller? Give your reasons.
See all solutions

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