Question

On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.

After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.

Instructions

What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2017, and its balance sheet at December 31, 2017?

Short answer

The sale of note receivables with resources willincrease the inflow of cash, increase resource liability and decrease the carrying value of the note receivable.

Step-by-step solution

Definition of Note Receivable

A financial instrument reflecting the amount that a business entity will collect from the debtor to whom sales were made on credit is known as a note receivable.

Effect of Sale of Note Receivable with Resource

The sale of note receivable will be reported as a decrease in the carrying value of the note receivable, increased cash, increased resource liability, and report the difference as gain or loss.