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Posted: April 20th, 2022

Need help with Accounting questions about the principal and interest

Question description

On July 1, 2015, 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, 2016.

On September 1, 2015, 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, 2017.

Moresan also has significant amount of accounts receivable as a result of credit sales to its customers. On
October 1, 2015, some accounts receivable were assigned to Indigo Finance Company on a non-
notification basis (Moresan handles collections) for an advance of 75% of their amount at an interest
charge of 8% on the balance outstanding.

On November 1, 2015, other accounts receivable were sold on a without guarantee (recourse) basis. The
factor withheld 5% of the accounts receivable factored as protection against sales returns and allowances
and changes a finance change of 3%.

Instructions

(a)  How should Moresan determine the interest revenue for 2015 on the:
1. Interest bearing note receivable? Why?
2. Zero-interest bearing note receivable? Why?

(b)  How should Moresan report the interest bearing note receivable and the zero-interest bearing note
receivable on its statement of financial position on December 31, 2015?

(c)  How should Moresan account for subsequent collections on the accounts receivable assigned on
October 1, 2015 and payment to Indigo Finance? Why?

(d)  How should Moresan account for the accounts receivable factored on November 1, 2015? Why? 

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