At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, respectively? a. Overstate, overstate, understate. b. Overstate, understate, understate. c. Overstate, overstate, overstate. d. None of these answer choices are correct.

Question

Daisy Duncan

Business

10 March, 09:23

At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, respectively? a. Overstate, overstate, understate. b. Overstate, understate, understate. c. Overstate, overstate, overstate. d. None of these answer choices are correct.

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Answers (1)

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Lee Berger · Answer 1

b. Overstate, understate, understate

Explanation:

when receiving the note value will be the 1,000 discounted at 8% for three years.

So this sales revenue should be lower.

On the subsequent years, the company is not doing the recognition of the accrued interest revenue so, their net income is understated as a portion of income generated during the year is not being disclosure.