On September 30, 2024, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.

After receiving the first of two equal annual installments on September 30, 2025, Rolen immediately sold the note with recourse. On October 9, 2026, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.

Instructions

a. 1. How should Rolen determine the sales price of the machine?

2. How should Rolen report the effects of the zero-interest-bearing note on its income statement for the year ended December 31, 2024? Why is this accounting presentation appropriate?

b. What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2025, and its balance sheet at December 31, 2025?

c. How should Rolen account for the effects of the note being dishonored?