Question

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.

Answer 1

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