Situation You are auditing the York Company when you come across a note receivable signed by the president of a company that is a major supplier The note has a face value of $100,000, is payable to the York Company, is dated January 1, 2007, and is payable January 1, 2008 The interest rate on the n...

1 To President York Company From Student I have researched the issue of how to account for the note ...

Situation You are auditing the York Company when you come across a note receivable signed by the

Question:

Situation You are auditing the York Company when you come across a note receivable signed by the president of a company that is a major supplier. The note has a of $100,000, is payable to the York Company, is dated January 1, 2007, and is payable January 1, 2008. The interest rate on the note is 1%. You ask the president of the York Company about the note and she responds “That is fine. We lent him some money to help him through a difficult divorce. We wanted him to pay interest, but he couldn’t afford the going rate of 8%. So how do you think we should account for the note?”

Directions
1. Research the related generally accepted accounting principles and prepare a short memo to the president that answers her question. Cite your references and applicable paragraph numbers.
2. How would your answer change if the interest rate on the note was 16%?
3. Do these valuation issues also create ethical issues?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...