Reference no: EM132860849

Question - On July 1, 2020, Erik Santos Company sold special order merchandise on credit and received in return an interest-bearing note receivable from the customer. Santos will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2021. On September 1, 2020, Santos sold special-order merchandise on credit and received in return a non-interest bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2022. Santos also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2020, some trade accounts receivable were assigned to Ayala Semion Finance Company on a non-notification (Santos handles collections) basis for an advance of 75% of their amount at an interest charge of 12% on the balance outstanding. On November 1, 2020, other trade accounts receivable were sold on a without recourse basis. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Required -

a. How should Santos determine the interest income for 2020 on the (1) Interest-bearing note receivable? Why? (2) Non-interest-bearing note receivable? Why?

b. How should Santos report the interest-bearing note receivable and non-interest-bearing note receivable on its balance sheet at December 31, 2020?

c. How should Santos account for subsequent collections on the trade accounts receivable assigned on October 1, 2020, and the payments to Ayala Semion Finance? Why?

d. How should Santos account for the trade accounts receivable factored on November 1, 2020? Why?