Question

In: Accounting

7.61/ At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The...

7.61/ At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively? And explain Why?

7.56/ Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because (Explain why choosing?)
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.

Solutions

Expert Solution

1 Gannon company has correctly accounted for the note receivable at $ 1000 and sales revenue at 1000. The incomes are not recognized until they are realiszed. Notional incomes are not recorded in Books of Accounts.
As a result of increase in sales revenue, the net earnings for 2013 would be high. This has no effect on net earnings of 2014 and 2015. The retained earnings of 2015 would increase because of increase in opening retained earnings.
2 The short term receivables are those amounts that the company is going to receive within an accounting year (i.e. a short period).
Short term receivables are interest - bearing. A notional amount of interest is always present (but the same is not recognized because it is not realized.
Allowance for uncollectible amounts lower the short term receivables balance, but irrespective of the amount short term receivables are presented at, allowance has to be recorded. Hence, it will not have an impact on short term receivables present values.
Most receivables can be sold to a banker, for which banker collects the discounting charges, an expense to be borne by the company. It is different from discounted value of future cash flows.
Because the short term receivables are going to be received within a short time, the notional interest earned is an immaterial amount in most cases.
Hence, the answer is option c

Related Solutions

Company A received a five year $25,000 note bearing interest of 3%. The market rate of...
Company A received a five year $25,000 note bearing interest of 3%. The market rate of the note is 2.5%. What amount of interest revenue will the company record at the end of the first year
Marigold Corporation issued a 5-year, $80,000, zero-interest-bearing note to Brown Company on January 1, 2020, and received cash of $45,394.
Brief Exercise 14-11Marigold Corporation issued a 5-year, $80,000, zero-interest-bearing note to Brown Company on January 1, 2020, and received cash of $45,394. The implicit interest rate is 12%.Prepare Marigold’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is...
Abbot Corp. issued a $270,000, three-year, zero-interest-bearing note payable to Athabasca Corp. for equipment on April...
Abbot Corp. issued a $270,000, three-year, zero-interest-bearing note payable to Athabasca Corp. for equipment on April 30, 2020. Abbot would normally pay interest at 6%. Abbot has a December 31 year-end and will repay the note with three equal yearly payments of $90,000. Abbot Corporation follows IFRS. Instructions Prepare the following journal entries for Abbot Corporation: Record the note December 31, 2020 interest accrual April 30, 2021 payment December 31, 2021 interest accrual April 30, 2022 payment As described in...
On January 1, 2017, Headland Company issued a $1,264,500, 5-year, zero-interest-bearing note to Sage Bank. The...
On January 1, 2017, Headland Company issued a $1,264,500, 5-year, zero-interest-bearing note to Sage Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Headland fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, Sage Bank decided that the loan was impaired. Headland will probably pay back only $843,000 of the principal at maturity. 1. Prepare journal entries for both Headland Company and Sage Bank to record the issuance...
On January 1, Bramble Corp. lent $39,000 to Marin Inc., accepting Marin’s $51,909, three-year, zero-interest-bearing note....
On January 1, Bramble Corp. lent $39,000 to Marin Inc., accepting Marin’s $51,909, three-year, zero-interest-bearing note. The implied interest is 10%. Bramble’s journal entries for the initial transaction, recognition of interest each year assuming use of the effective interest method, and the collection of $51,909 at maturity. Account Titles Debit Credit (To record initial transaction) (To record interest income in the first year) (To record interest income in the second year) (To record interest income in the third year) (To...
1. Flint Corporation issued a 4-year, $48,000, zero-interest-bearing note to Garcia Company on January 1, 2017,...
1. Flint Corporation issued a 4-year, $48,000, zero-interest-bearing note to Garcia Company on January 1, 2017, and received cash of $48,000. In addition, Flint agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Flint Corporation’s January 1 journal entry. 2. At December 31, 2017, Wildhorse Corporation has the following account balances: Bonds payable, due January 1, 2026 $2,400,000 Discount on...
On November 1, 2020, France Corp. signed a three-month, zero-interest-bearing note for the purchase of $60,000...
On November 1, 2020, France Corp. signed a three-month, zero-interest-bearing note for the purchase of $60,000 of inventory. The maturity value of the note was $60,600, based on the bank’s discount rate of 4%. The adjusting entry prepared on December 31, 2020 in connection with this note will include a: a. debit to Note Payable for $400. b. credit to Interest Expense for $200. c. debit to Interest Expense for $600. d. credit to Note Payable for $400.
On January 1, 2017, Harrison Inc. purchased land by issuing a 4-year, zero-interest-bearing note in the...
On January 1, 2017, Harrison Inc. purchased land by issuing a 4-year, zero-interest-bearing note in the face amount of $104,864. The company has to pay 7% interest for funds from its bank and has a December 31 fiscal year end. Prepare the following journal entries: January 1, 2017 December 31, 2017 December 31, 2018
Nicholas Company loaned $68,587 to Nathan, Inc. in exchange for Nathan’s 2-year, $80,000, zero-interest-bearing note.  Nathan’s incremental...
Nicholas Company loaned $68,587 to Nathan, Inc. in exchange for Nathan’s 2-year, $80,000, zero-interest-bearing note.  Nathan’s incremental borrowing rate for comparable debt is 8%. Required: Prepare an effective interest amortization schedule for Nicholas relative to this note. (Round to whole dollars.) Prepare Nicholas’ journal entries for the initial loan transaction, recognition of interest each year, and the collection of the note at maturity.
if we issue a zero interest bearing note payable that has a term of 4-months, how...
if we issue a zero interest bearing note payable that has a term of 4-months, how would we record it? Assume we issue at $102,000 a 4-month, zero-interest bearing note to ABC, National Bank. The present value of the note is $100,000. How would we show the note on our financial statements before we pay it off?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT