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Chapter 7: 7CA_a (page 377)

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

(a) How should Moresan determine the interest revenue for 2017 on the:

(1) Interest-bearing note receivable? Why?

(2) Zero-interest-bearing note receivable? Why?

Short Answer

Expert verified

Interest revenue for interest-bearing notes will becalculated using face value and interest rate for six months. Interest revenue for zero-interest bearing notes will be computed using discounted present value and market rate of interest for four months.

Step by step solution

01

Definition of Accrued Interest

Accrued interest is defined as the interest expenses due for any amount borrowed but is still unpaid. Such interest is reported as a current liability.

02

Interest Revenue

(1) Interest-bearing note: Interest revenue for interest-bearing notes will be calculated by multiplying the principal amount by the interest rate and 6/12. It is multiplied by 6/12 because the interest gets accrued for July to December.

(2) Zero-Interest bearing note: Interest revenue for non-interest-bearing notes is calculated by multiplying the carrying value of the note, market interest rate, and 4/12. The carrying value is calculated as the present value of the face amount on September 1 from the maturity date. The discounted value must be calculated at the market rate of interest.

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Most popular questions from this chapter

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

How should Moresan account for subsequent collections on the trade accounts receivable assigned on October 1, 2017, and the payments to Indigo Finance? Why?

Presented below is information from Perez Computers Incorporated.

July 1 Sold \(20,000 of computers to Robertson Company with terms 3/15, n/60. Perez uses the gross method to record cash discounts. Perez estimates allowances of \)1,300 will be honored on these sales.

10 Perez received payment from Robertson for the full amount owed from the July transactions.

17 Sold $200,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.

30 The Clark Store paid Perez for its purchase of July 17.

Instructions

Prepare the necessary journal entries for Perez Computers.

Which of the following statements is true?

(a) The fair value option requires that some types of financial instruments be recorded at fair value.

(b) The fair value option requires that all noncurrent financial instruments be recorded at amortized cost.

(c) The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value.

(d) The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future.

(Bank Reconciliation and Adjusting Entries) Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.

June 30 Bank Reconciliation Statement

Balance per bank

\(7,000

Add: Deposit in transit

1,540

Less: Outstanding checks

(2,000)

Balance per books

\)6,540

Month of July Results

Per Bank

Per Books

Balance July 31

\(8,650

\)9,250

July Deposits

5,000

5,810

July Checks

4,000

3,100

July note collected (not included in July deposits)

1,000

-

July bank service charge

15

-

July NSF check from a customer, returned by the bank (recorded by bank as a charge)

335

-

Instructions

(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.

(b) Prepare the general journal entry or entries to correct the Cash account.

Answer

(Expected Cash Flows) On December 31, 2017, Conchita Martinez Company signed a \(1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2019, Sauk City Bank determined that it was probable that the company would pay back only \)600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.

Instructions

(a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2017.

(b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2019.

(c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2019.
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