Question

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2017?

Short answer

Interest-bearing notes are reported as current assets, while zero-bearing notes are reported as non-current assets.

Step-by-step solution

Definition of Current Assets

All the resources that will generate benefits for the business entity before the end of the operating cycle are known as current assets.

Reporting Notes on Balance Sheet

1. Interest-bearing notes will be reported as Current assets on the balance sheet prepared on 31 December 2017.

2. Zero-Interest-Bearing note will be reported under non-current assets on the balance sheet prepared on 31 December 2017. Its face value is adjusted against the unamortized discount for reporting purposes.