A firm sells $200,000 of interest-bearing two-year notes receivable to a bank, with recourse, for $208,978. The

Question:

A firm sells $200,000 of interest-bearing two-year notes receivable to a bank, with recourse, for $208,978. The interest rate on the notes is 10 percent, and the bank’s effective interest rate is 7.5 percent. What are the financial statement effects of this transaction if

(a) the receivable is viewed as sold, and

(b) the receivable is viewed as providing collateral for a bank loan? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?

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