SELLING NOTES RECEIVABLE WITH RECOURSE. Martenson Corporation builds small shopping centers and then sells them to local investors. A typical sales transaction requires the shopping center buyers to provide a very small down payment and a note for the balance. The buyers expect the cash flows from rent on the shopping center to provide the cash necessary for the interest and principal payments on the note. Martenson immediately sells the note to a local bank, promising to take the note back if the buyers of the property default.

REQUIRED:

1. Has Martenson really sold these notes? (Hint: Read paragraph 5 of Statement of Financial Accounting Standards No. 77.)

2. If Martenson considers these notes sold, how should the contingent liability for these notes be reported in its financial statements?