Case Number 02

In business accounting, notes receivable are promissory notes that represent an asset. These promissory notes are either short-term or long-term and should be recorded on the balance sheet differently. Notes receivable include principal and interest, and short-term and long-term notes receivable have the same interest calculation. However, on long-term notes receivable, unpaid interest can be carried over from year to year.

Jose Orozco went into similar kind of situation at the beginning of the year where Ben Gazarra Inc. was in need of capital for upgradation of an old car wash and they signed a promissory note with Jose Orozco Co Inc. According to the contract Jose Orozco received a note receivable of $500,000 (5 years), with bearing interest of 12 percent. The market rate of interest for a note of similar risk is 15 percent.

Requirement

1. At which value Jose Orozco Inc. accountant will record the account receivable in the balance sheet? (02)

2. Is the accountant of Jose Orozco Inc. will prepare discount amortization table? If yes, then prepare discount amortization table for coming five years. (02)

3. Prepare a table showing appropriate journal and adjusting entries by the end of each for five years. (02)

4. Why the treatment of long term notes receivable is different as compare to short term note receivable?