The memo analyzes two alternatives for accounting treatment of notes receivable from the CEO's cousins. Alternative 1 treats the notes as separate assets with related party disclosures. Alternative 2 treats the notes as a reduction of equity, citing codification 505-10-45-2. The memo recommends Alternative 2, as the notes were received as contributions to equity without stated repayment terms. Disclosure of the nature and amounts of the transactions is still required.

1. Alternative 1 - Note Receivable separate from other assets with
a related party disclosure
According to codification 850-10-20 (Related Party glossary)
this transaction would be classified as an “Immediate Family”
transaction:
Family members who might control or influence a principal
owner or a member of
management, or who might be controlled or influenced by a
principal owner or a
member of management, because of the family relationship.
Thus, according to 850-10-50 (Disclosure) we must not only
disclose the transaction, but we need to record the nature of the
relationship (cousin’s of CEO John Sigar), a description of the
transaction (note receivable backed on preferred stock), and
“the amounts for the transactions for each period for which
income statements are presented, and the amount due from the
related parties as of the date of each balance sheet” (FASB
codification 850-10-50-1 c and d).
Now here is where it becomes a little less clear. According to
codification 85-10-50-2, “Notes or accounts receivable from
officers, employees, or affiliated entitiesmust be shown
separately and not included under a general heading such as
notes receivable or accounts receivable.” As this transaction is
with immediate family and not from the aforementioned entities
we may not technically have to separate the note from other
assets. It is under my opinion though that we should separate
this asset, as it feels like we would be in violation of the spirit
of the FASB related party codification section in not doing so.
Alternative 2 - Notes are classified as a reduction of equity

2. (This is the correct codification, via Prof Almer. See if you two
can make some sort of coherent statement about it. I’m having a
hell of a time.)
505-10-45
> Receivables for Issuance of Equity
Currently Viewing:
505 Equity
10 Overall
45 Other Presentation Matters
General
> Receivables for Issuance of Equity
45-2
An entity may receive a note, rather than cash, as a contribution
to its equity. The transaction may be a sale of capital stock or a
contribution to paid-in capital. Reporting the note as an asset is
generally not appropriate, except in very limited circumstances
in which there is substantial evidence of ability and intent to
pay within a reasonably short period of time, for example, as
discussed for public entities in paragraph 210-10-S99-1
(paragraphs 27 through 29), which requires a deduction of the
receivable from equity. However, such notes may be recorded as
an asset if collected in cash before the financial statements are
issued or are available to be issued (as discussed in Section
855-10-25).
Background:
You are a new staff accountant working in the Financial
Reporting Department of Philadelphia Communications Inc.
(“Philly”). Philly is a public company that completed an initial
public offering (IPO) a few months ago. Decedents of the

3. founding family still own a significant amount of the company’s
stock. John Sigar, the eldest grandchild of the founder, is the
current CEO of the company and member of the board of
directors. He is the only family member still involved in the
business.
You have been assigned to review the reconciliation of
receivables from shareholders. There are a number of notes
receivable from several of Mr. Sigar’s cousins. These cousins
have taken advances frequently over the years and have never
failed to repay notes when they came due. These notes are
secured by shares of Philly’s convertible preferred stock
purchased by the family members following the IPO, but no
other terms for the notes were specified in the supporting
documentation.
You remember from your first quarter in intermediate
accounting that there are some special presentation or
classification issues regarding these sorts of receivables. You
also understand the family members are considered “related
parties” and there are some extra disclosures required as a
result.
You have reviewed your old notes and looked over Chapter 7 of
your “Kieso” textbook, but there is nothing included on this sort
of situation. You do not think collectibility is an issue primarily
because (1) the Sigars are very wealthy, (2) they have paid in
the past and (3) the preferred stock that secures the notes is
worth a good deal more than the amounts due.
After thinking about this issue, you bring it to the attention of
the Eli, the Financial Reporting Manager. Eli agrees that there
is a potential concern here about the correct presentation of the
receivables on the financial statements. Eli says that based on
her recollection of the authoritative literature, there are two
possibilities on how this could be reported:

4. Alternative 1 — Notes are classified as assets separate from
other receivables and related party disclosures are provided.
Alternative 2 — Notes are classified as a reduction of equity
(either as a receivable within equity or as a distribution to
shareholders).
Required:
Eli has asked you to research this issue using the FASB
Codification database available (I already made the research
and found the codifications, you will find them in the other
attachment). After you have researched the issue, you should
write a memo detailing the authoritative support for these two
alternatives and the circumstances under which each alternative
would be appropriate. She asks that your memo specify the
following:
1. Applicable Codification references. (The format of your
reference should follow ASC xxx-xx-xx)
2. Related presentation and disclosure issues for the notes.
3. Any additional clarifying information needed from company
management.
Format of Write-up: Your write-up should be in a 1-2 page
professional memo format. Memos are generally single spaced
with blank lines between paragraphs. The requirements of the
assignment should be addressed in well-reasoned,
grammatically correct sentences. The memo should utilize a
standard heading as follows:
TO: Eli
FROM: (all your names listed alphabetically by last name)
DATE: (complete and current date)
SUBJECT: Accounting Treatment of Notes Receivable from
Sigar Family
The first paragraph of the memo should be fairly short and

5. should describe the basic purpose of your memo. The paragraph
should not contain too much detail (that comes in later
paragraphs), but could include a sentence or two describing the
problem.
The following paragraphs should address the questions raised by
Eli by referencing the authoritative literature and logic. This is
the most important part of your memo.
Lastly there should be a closing paragraph that provides a
detailed recommendation or course of future action
Other tips - You should also be sure to have several people
proofread your memo. And if WORD says that there is a
spelling or grammar problem, pay attention to it! While the
software isn’t always right, in many instances it can help you be
a better writer. Finally, this is a memo – there is no need to use
any sort of title page, binding or folders. Simply staple the
pages of the memo together when you turn them in.
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