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Chapter 7: Question: E7-14 (page 367)

(Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.

Instructions

(a) Prepare the journal entry to record the transaction of December 31, 2015, for the Ed Abbey Co.

(b) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

(c) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

Short Answer

Expert verified

The discount on the note is equal to$165,290.

Step by step solution

01

Definition of Fiscal Year

Period of one year that is used by a business entity or individual for reporting their financial transactions for tax purposes is known as fiscal year. For example,1st April 2019- 31st March 2020.

02

Journal entry for 31 December 2015

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2015

Note receivables

$200,000

Discount on note receivable

$200,00011+102

$165,290

Service revenue

$34,710

03

Journal entry for 31 December 2016

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2016

Discount on note receivable

$165,290脳10%

$16,529

Interest revenue

$16,259

04

Journal entry for 31 December 2017

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Discount on note receivable$165,290+$16,529脳10%

$18,182

Interest revenue

$18,182

31 Dec 2017

Cash

$200,000

Note receivable

$200,000

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Most popular questions from this chapter

(Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of \(200,000 to Joffrey Company for \)160,000 on a with recourse basis.

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2017?

3. Which of the following statements is false?

(a) Receivables include equity securities purchased by the company.

(b) Receivables include credit card receivables.

(c) Receivables include amounts owed by employees as a result of company loans to employees.

(d) Receivables include amounts resulting from transactions with customers.

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
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