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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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You are the accountant for Speedy Company and are preparing the financial statements for 2019. Near the end of 2019, Speedy loaned its president $100,000 (a material amount) because she was having financial difficulties. The note was properly recorded as a note receivable by Speedy. You are unsure of how to classify this note on the 2019 ending balance sheet and ask the president when the note is due. She replies, “We never really set a due date; I might repay it in 2020 or maybe in a couple of years when I get more financially secure. It would be best to classify this note as a current asset in the usual manner because that will increase our working capital and current ratio, which will make our creditors and shareholders happy.”

Required:

From financial reporting and ethical perspectives, what do you think of the president’s suggestion?

To determine

Explain how to think of the president suggestion from financial reporting and ethical perspectives.

Explanation

Notes Receivable

Notes receivable is a legal agreement between the borrower (buyer) and the creditor (seller) that the borrower pays cash as per the written deed to the seller on a particular future date.

Financial reporting perspective:

At the end of 2019, Company S’s president takes a loan of $100,000 from the company, and it is a related party transaction of note receivable for the company. As per GAAP (Generally Accepted Accounting Principle), Company S required to disclose the following with regard to the related party transaction:

  • Nature of the transaction,
  • Description of the transaction,
  • Amount transacted,
  • Amount due from borrower.

The note can be classified as current asset, if note receivable is expected to be collected in 2020, or as noncurrent asset, if note receivable is expected to be collected after 2020. Hence, GAAP does not specifies where or how to classify the related party transaction...

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