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better_samson
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Joined: 25 Aug 2011
Location: United States
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Posts: 11

Posted: 27 Sep 2011 at 05:33 \| IP Logged

Dear all:

I don't understand this question and its answer:
On December 31, 1991, Jet Co. received two $10,000 notes receivable
from customers in exchange for services rendered. On both notes,
interest is calculated on the outstanding principal balance at the annual
rate of 3% and payable at maturity. The note from Hart Corp., made under
customary trade terms, is due in nine months and the note from Maxx,
Inc. is due in five years. The market interest rate for similar notes on
December 31, 1991, was 8%. The compound interest factors to convert
future values into present values at 8% follow:
Present value of $1 due in nine months:     .944 Present value of $1 due in
five years:     .680
At what amounts should these two notes receivable be reported in Jet's
December 31, 1991, balance sheet?
     Hart    &n bsp; Maxx
a. $9,440   $6,800
b. $9,652   $7,820
c. $10,000 $6,800
d. $10,000 $7,820

The answer is D

And I don't really understand why is Hart $10,000, and the answer
explains that since Hart is under customary trade terms, and the rule is
"Trade notes and accounts receivable with customary trade terms not
exceeding one year may be recorded at face amount."

The Becker text book says nothing about this and I am so confused coz it
seems to it comes out from no where and when should I recognize the
discount amount.
so can someone please explain this "Customary Trade Terms" to me.

Thank you

chatterr
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Joined: 17 Nov 2010
Online Status: Offline
Posts: 67

Posted: 27 Sep 2011 at 13:55 \| IP Logged

Hi Better_Sampson,

The reason Jet company does not discount the note receivable from Hart and records the note at the face value of $10,000 is that the note receivable from Hart is due within 1 year. FASB says that if a company sells goods to a customer under the normal course of business in exhange for note receivable and the note is due within 1 year, then the risk of change in interest rate is low and the note can be recorded at the face value which is 10,000 in this case.

Howver, the note from Maxx is due in 5 years which exceeds the 1 year limit and therefore, you should discount the note and record it at
10,000(.680)= 6,800

So I think the answer should be C rather than D.

better_samson
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Joined: 25 Aug 2011
Location: United States
Online Status: Offline
Posts: 11

Posted: 07 Oct 2011 at 23:08 \| IP Logged

Hi, chatterr

That explains everything!!! plus later chapter actually talks about this, which
matches what you say here.

Thanks a million

Samson

kia_b2008
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Joined: 20 Jul 2011
Location: United States
Online Status: Offline
Posts: 27

Posted: 10 Oct 2011 at 07:40 \| IP Logged

Choice D is correct. This is an unreasonable interest problem and you need to calculate the maturity value on the Maxx Note.

Note 10,000 + Unreasonable Int 10,000*3%*5 = 11,500 Maturity Value

11,500*.680=7,820

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