On September 1, 2020, Myo Inc. sold goods to Khin Corporation, a new customer. Before shipping the goods, Myo’s credit and collections department conducted a procedural credit check and determined that Khin is a high credit-risk customer. As a result, Myo did not provide Khin with open credit by recording the sale as an account receivable. Instead, Myo required Khin to provide a non–interest-bearing promissory note for $35,000 face value, to be repaid in one year. Khin has a credit rating that requires it to pay 12% interest on borrowed funds. Myo pays 10% interest on a loan recently obtained from its local bank. Myo has a December 31 year end.

Instructions

a. Prepare the entries required on Myo’s books to record the sale, annual adjusting entry, and collection of the note’s full face value.

b. Assume that on the note’s maturity date, Khin informs Myo that it is having cash flow problems and can pay Myo only 80% of the note’s face value. After extensive discussions with Khin’s management, Myo’s credit and collections department considers the remaining balance of the note uncollectible. Prepare the entry required on Myo’s books on the note’s maturity date.

c. What else could Myo have done to decrease collection risk related to the sale to Khin?