Question

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment?

Short answer

The value of note receivables must be measured by determining the discounted present value using the market rate of interest.

Step-by-step solution

Definition of Carrying Value

Carrying Value can be defined as the value of the asset or liability on which it is reported in the financial statement.

Valuation of Notes Receivable

The note receivable must bemeasured at its discounted present value of the amount received in the future for principal and interest. Discounted present value is calculated using the market rate of interest.