Does a Receivable or Liability Exist? Motif Company entered into an agreement with Joe Putz in March 2000 in which Joe agreed to pay Motif $350,000 to develop a prototype of a self-washing window suitable for installation in homes. Joe gave $300,000 to Motif when the agreement was signed and promised to give the remaining $50,000 on June 30, 2001, if the prototype was developed by that date.

The agreement states that if Motif fails to deliver the prototype by June 30, 2001, it will return $200,000 to Joe within 60 days. Motif Corporation included an account receivable of

$50,000 from Joe in its balance sheet at December 31, 2000.

a. What factors should be considered in determining whether Motif has an account receivable of $50,000 or a liability of $200,000 at December 31, 2000?

b. If at December 31, 2000, Motif concludes that it will be unable to meet the deadline, must a liability be reported at December 31, 2000? Explain.

c. If Motif concludes a liability must be reported at December 31, 2000, should the liability be classified as a current or long-term liability? Explain.