You are conducting an annual audit of Granite Corporation, which has total assets of approximately $1 million and operates a wholesale merchandising business. The corporation is in good financial condition and maintains an adequate accounting system. Granite Corporation owns about 25 percent of the capital stock of Desert Sun, Inc., which operates a dude ranch. This investment is regarded as a permanent one and is accounted for by the equity method.
During your audit of accounts and notes receivable, you uncover the information shown below concerning three short-term notes receivable due in the near future. All three of these notes receivable were discounted by Granite Corporation with its bank shortly before the balance sheet date.
1. A 13 percent 60-day note for $50,000 received from a customer of unquestioned financial standing.
2. A 15 percent six-month note for $60,000 received from the affiliated company, Desert Sun, Inc. The affiliated company is operating profitably, but it is presently in a weak cash position because of recent additions to buildings and equipment. The president of Granite Corporation intends to make an $80,000 advance with a five-year maturity to Desert Sun, Inc. The proposed advance will enable Desert Sun, Inc., to pay the existing 15 percent $60,000 note at maturity and to meet certain other obligations.
3. A 14 percent $20,000 note from a former key executive of Granite Corporation whose employment had been terminated because of chronic alcoholism and excessive gambling. The maker of the note is presently unemployed and without personal resources.
Describe the proper balance sheet presentation with respect to these discounted notes receivable. Use a separate paragraph for each of the three notes, and state any assumptions you consider necessary.