Hogan Company uses the net method of accounting for sales discounts. Hogan offers trade discounts to various groups of buyers.
On August 1, 2011, Hogan factored some accounts receivable on a without recourse basis. Hogan incurred a finance charge.
Hogan also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2011, and mature on September 30, 2012. Hogan's operating cycle is less than one year.
1. a. Using the net method, how should Hogan account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method?
1. b. Using the net method, what is the effect on Hogan's sales revenues and net income when customers do not take the sales discounts?
2. What is the effect of trade discounts on sales revenues and accounts receivable? Why?
3. How should Hogan account for the accounts receivable factored on August 1, 2011? Why?
4. How should Hogan report the effects of the interest-bearing notes receivable in its December 31, 2011, balance sheet and its income statement for the year ended December 31, 2011? Why?