Question

 

Hogan Company uses the net method of accounting for sales discounts. Hogan offers trade discounts to various groups of buyers.

On August 1, 2021, Hogan factored some accounts receivable on a without recourse basis. Hogan incurred a finance charge.

Hogan also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2021, and mature on September 30, 2022. Hogan’s operating cycle is less than one year.

Required:

1a. Using the net method, do sales discounts affect the amount recorded as sales revenue and accounts receivable at the time of sale? YES/NO?
1b. Using the net method, is there an effect on Hogan’s sales revenues and net income when customers do not take the sales discounts? YES/NO?
2. Do trade discounts affect the amount recorded as sales revenue and accounts receivable? YES/NO
3. Should Hogan decrease accounts receivable to account for the receivables factored on August 1, 2021? YES/NO
4. Hogan should report the face amount of the interest-bearing notes receivable and the related interest receivable for the period from October 1 through December 31 on its balance sheet as: CURRENT ASSETS/ NON-CURRENT ASSETS?

 

Answer 1

1a. YES, Undernet method Sales are recorded at cash price on the date of sale. Since Hogan is using the net method, He shall record the Sales Revenue and Accounts Receivable at the amount of Sales less sales discount at the date of sale. In fact, Revenue shall be recorded for the cash amount of the price at the date of sale.

1b. YES, a Sales Discount is given for the early payment done by the buyer. It does not affect the sales revenue when customers do not take sales discounts. However, his net income will be increased by the amount of interest earned when the customer chooses not to take the sales discount. Therefore, His Sales revenue will have no effect but his net income will be increased by the amount of interest earned.

2. YES, Trade Discounts are discount given on the list price. It is not recorded in books of accounts and also is not reported in financial statements. The amount recorded as sales revenue and accounts receivable is net of trade discount. Therefore, the amount recorded as sales revenue and accounts receivable will be the Net price after giving the trade discount on this list price.

3. YES, Here Hogan has factored some accounts receivable on a without recourse basis. Without recourse means he has passed on the risk of default by the debtor. He has essentially sold his debtor. In this case, he shall reduce the account receivable by the accounts receivable factored and increase the cash account by the cash he received. The cash he will receive will be lower than the accounts receivable factored and that difference will be recognized as a loss.

4. CURRENT ASSETS, Interest Revenue are recognized based on accrual concept (passage of time). Fact that he will receive the amount of principal and total interest due at maturity only is not relevant here. Also If the amount due to be received is less than a year then they are considered as Current Asset else Noncurrent Asset. In the given case Interest Receivable for the period October 1, 2021, to December 31, 2021, along with the face amount of the interest-bearing notes shall be reported as Current Assets, Since both the assets are due to be received on September 30, 2022, which is less than a year. Also, Hogan should report the amount of interest receivable for the period of three months (oct to dec) as Interest revenue in the income statement for the period ended December 31, 2021.