On July 1, 2025, 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, 2026. 

On September 1, 2025, 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, 2027.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2025, some trade 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, 2025, other trade accounts receivable were sold on a without recourse basis. 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

a. How should Moresan determine the interest revenue for 2025 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 balance sheet at December 31, 2025?

c. How should Moresan account for subsequent collections on the trade accounts receivable assigned on October 1, 2025, and the payments to Indigo Finance? Why?

d. How should Moresan account for the trade accounts receivable factored on November 1, 2025? Why?