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

How should Corrs account for the sale, without recourse, of a February 1, 2017, note receivable sold on May 1, 2017? Why is it appropriate to account for it in this way?

Short answer

Carrying value must be added with the effective interest revenue, and the business entity must recognize gain or loss on the sale of receivables.

Step-by-step solution

Definition of Face Value

The value stated on the financial instrument or financial security is known as face value. It might differ from the value at which the instrument or security is issued.

Accounting for Sale Without Resources

The carrying value of the note receivable must be increased by adding the amount of effective interest revenue for the period starting from 1 February 2017 to 1 May 2017. On the sale of receivables without resources, the business entity must increase the cash amount by eliminating the carrying value and recognizing gain or loss equal to the difference between the carrying value and the amount received.

This reporting is appropriate because the note receivable is initially reported at its carrying value. When sold without resources, the business entity must report for gain or loss.