At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively?

Question

Quizplus · Accepted Answer

The correct accounting treatment for a zero-interest-bearing note should involve discounting the note's value at the market rate of interest to determine its present value at the time of issuance. This means the initial sales revenue and note receivable should have been recorded at a discounted value, not the face value of $1,000. Over the life of the note, interest income should be recognized, increasing the carrying amount of the note receivable and recognizing interest income, which would increase net earnings gradually over the three years. The question's scenario does not provide enough detail to determine the exact effects on net earnings and retained earnings without the calculations based on the discount rate and the note's term. Therefore, none of the provided choices accurately describe the effects on Gannon's financial statements.

At the Beginning of 2013, Gannon Company Received a Three-Year