Sergey Luzov Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Luzov. At year end, Luzov evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

(a) What is the appropriate valuation basis for Luzov’s notes receivable at the date it sells equipment?

(b) How should Luzov account for the sale, without recourse, of a February 1, 2008, note receivable sold on May 1, 2008? Why is it appropriate to account for it in this way?

(c) At December 31, 2008, how should Luzov measure and account for the impact of estimated losses resulting from notes receivable that it

(1) Retained and did not sell?

(2) Sold to bank with recourse?