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Notes receivable

(Reporting of Notes Receivable, Interest, and Sale of Receivables) On July 1, 2007, Gale Sondergaard Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Sondergaard 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, 2008.

On September 1, 2007, Sondergaard 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, 2009.
Sondergaard also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2007, some trade accounts receivable were assigned to Irene Dunne Finance Company on a non-notification (Sondergaard handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.
On November 1, 2007, other trade accounts receivable were sold on a without recourse basis. 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

1. How should Sondergaard determine the interest revenue for 2007 on the:
1. Interest-bearing note receivable? Why?
2. zero-interest-bearing note receivable? Why?
2. How should Sondergaard report the Interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2007?
3. How should Sondergaard account for subsequent collections on the trade accounts receivable assigned on October 1, 2007, and the payments to Irene Dunne Finance? Why?
4. How should Sondergaard account for the trade accounts receivable factored on November 1, 2007? Why?

(AICPA adapted)

Solution Preview

1. How should Sondergaard determine the interest revenue for 2007 on the Interest-bearing note receivable? Why?
zero-interest-bearing note receivable? Why?

For the interest bearing note the interest revenue should be determined as Face Value of Note X Interest Rate X 6/12 (for the period July to Dec). Interest accrues as time passes and so the revenue is recorded for the time period that has elapsed.
For the non interest bearing note, when the note is received, it would be recorded with a discount to notes receivable, the discount based on the prevailing market rate of interest. In this case the interest is calculated as ...

Solution Summary

The solution explains various accounting treatment for notes receivable

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