P7-10 (Comprehensive Receivables Problem) Connecticut Inc. had the following lon
ID: 2389517 • Letter: P
Question
P7-10 (Comprehensive Receivables Problem) Connecticut Inc. had the following long-term receivableaccount balances at December 31, 2006.
Note receivable from sale of division $1,800,000
Note receivable from officer 400,000
Transactions during 2007 and other information relating to Connecticut’s long-term receivables were
as follows.
1. The $1,800,000 note receivable is dated May 1, 2006, bears interest at 9%, and represents the balance
of the consideration received from the sale of Connecticut’s electronics division to New York
Company. Principal payments of $600,000 plus appropriate interest are due on May 1, 2007, 2008,
and 2009. The first principal and interest payment was made on May 1, 2007. Collection of the note
installments is reasonably assured.
2. The $400,000 note receivable is dated December 31, 2006, bears interest at 8%, and is due on December
31, 2009. The note is due from Sean May, president of Connecticut Inc. and is collateralized by 10,000
shares of Connecticut’s common stock. Interest is payable annually on December 31, and all interest
payments were paid on their due dates through December 31, 2007. The quoted market
price of Connecticut’s common stock was $45 per share on December 31, 2007.
3. On April 1, 2007, Connecticut sold a patent to Pennsylvania Company in exchange for a $200,000
zero-interest-bearing note due on April 1, 2009. There was no established exchange price for the
patent, and the note had no ready market. The prevailing rate of interest for a note of this type at
April 1, 2007, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor).
The patent had a carrying value of $40,000 at January 1, 2007, and the amortization for the year
ended December 31, 2007, would have been $8,000. The collection of the note receivable from Pennsylvania
is reasonably assured.
4. On July 1, 2007, Connecticut sold a parcel of land to Harrisburg Company for $200,000 under an
installment sale contract. Harrisburg made a $60,000 cash down payment on July 1, 2007, and
signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and
interest on the note will be $45,125 payable on July 1, 2008, through July 1, 2011. The land could
have been sold at an established cash price of $200,000. The cost of the land to Connecticut was
$150,000. Circumstances are such that the collection of the installments on the note is reasonably
assured.
Instructions
(a) Prepare the long-term receivables section of Connecticut’s balance sheet at December 31, 2007.
(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest
receivable that would appear in Connecticut’s balance sheet at December 31, 2007.
(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear
on Connecticut’s income statement for the year ended December 31, 2007.
Explanation / Answer
(a) Connecticut Inc. Long-Term Receivables Section of Balance Sheet December 31, 2002 9% note receivable from sale of division, due in annual installments of $600,000 to May 1, 2004, less current installment $600,000 (1) 8% note receivable from officer, due Dec. 31, 2004, collateralized by 10,000 shares of Connecticut, Inc., common stock with a fair value of $450,000 400,000 Noninterest-bearing note from sale of patent, net of 12% imputed interest, due April 1, 2004 173,746 (2) Installment contract receivable, due in annual installments of $45,125 to July 1, 2006, less current installment 110,275 (3) Total long-term receivables $1,284,021 (b) Connecticut Inc. Selected Balance Sheet Balances December 31, 2002 Current portion of long-term receivables: Note receivable from sale of division $600,000 (1) Installment contract receivable 29,725 (3) Total current portion of long-term receivables $629,725 Accrued interest receivable: Note receivable from sale of division 72,000 (4) Installment contract receivable 7,700 (5) Total accrued interest receivable $79,700 (c) Connecticut Inc. Interest Revenue from Long-Term Receivables For the Year Ended December 31, 2002 Interest income: Note receivable from sale of division $126,000 (6) Note receivable from sale of patent 14,346 (2) Note receivable from officer 32,000 (7) Installment contract receivable from sale of land 7,700 (5) Total interest income for year ended 12/31/02 $180,046 Explanation of Amounts (1) Long-term Portion of 9% Note Receivable at 12/31/02 Face amount, 5/1/01 $1,800,000 Less installment received 5/1/02 600,000 Balance, 12/31/02 1,200,000 Less installment due 5/1/03 600,000 Long-term portion, 12/31/02 $ 600,000 (2) Noninterest-bearing Note, Net of Imputed Interest at 12/31/02 Face amount 4/1/02 $ 200,000 Less imputed interest [$200,000 – ($200,000 X 0.797)] 40,600 Balance, 4/1/02 159,400 Add interest earned to 12/31/02 ($159,400 X 12% X 9/12) 14,346 Balance, 12/31/02 $ 173,746 (3) Long-term Portion of Installment Contract Receivable at 12/31/02 Contract selling price, 7/1/02 $ 200,000 Less down payment, 7/1/02 60,000 Balance, 12/31/02 140,000 Less installment due, 7/1/03 [$45,125 – ($140,000 X 11%)] 29,725 Long-term portion, 12/31/02 $ 110,275 (4) Accrued Interest—Note Receivable, Sale of Division at 12/31/02 Interest accrued from 5/1 to 12/31/02 ($1,200,000 X 9% X 8/12) $ 72,000 (5) Accrued Interest—Installment Contract at 12/31/02 Interest accrued from 7/1 to 12/31/02 ($140,000 X 11% X 1/2) $ 7,700 (6) Interest Revenue—Note Receivable, Sale of Division, for 2002 Interest earned from 1/1 to 5/1/2002 ($1,800,000 X 9% X 4/12) $ 54,000 Interest earned from 5/1 to 12/31/02 ($1,200,000 X 9% X 8/12) 72,000 Interest income $ 126,000 (7) Interest Revenue—Note Receivable, Officer, for 2002 Interest earned 1/1/ to 12/31/02 ($400,000 X 8%) $ 32,000 *If you can not see clearly , give me your email, i will send it to you
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