Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer to make 10 semiannual installments of $50,000 each. The first installment begins 6 months from the date the customer took delivery of the damaged inventory. Johnson's management estimates that the fair value of the damaged inventory is $320,883
Accounting
a. What interest rate is Johnson implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding
b. At what dollar amount do you think Johnson should record the note receivable on the day the customer takes delivery of the damaged inventory?
Analysis
Assume the note receivable for damaged inventory makes up a significant portion of Johnson's assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why
Principles
The IASB has issued an accounting standard that allows companies to report assets such as notes receivable at fair value. Discuss how fair value versus historical cost potentially involves a trade-off of one desired quality of accounting information against another