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

(c) How should Rolen account for the effects of the note being dishonored?

Short answer

When the note is dishonored, the business entity willreduce the cash, increase the note receivable carrying value, and report a loss due to the non-receipt of the payment.

Step-by-step solution

Definition of Maturity Date

A specified date on which the borrower is liable to repay the borrowed amount along with interest is known as the maturity date.

Effect of Note Being Dishonored

The dishonored note must be reported as a decrease in cash, increase in receivables and decrease in resource liability. The note receivable must be written down by the amount of money that can be recovered, and loss should be recognized for uncollectible notes.