Accounting for long-term receivables*

Mobile phone operators in Europe were financially stretched in the early 2000s as a result of large payments on third-generation (3G) licences and the cost of establishing 3G networks. Many asked for and received - favourable financing terms from telecom equipment makers such as Nokia and Motorola.

In one such deal with a face value of A500 million, Mapletel provides vendor financing on the sale of equipment to Eco, a Spanish mobile phone operator. Under the terms of the contract, Eco receives the equipment in the final quarter of 2003. It pays for the equipment in two equal instalments of A250 million at the end of 2004 and 2005. Interest accrues from 1 January 2004 at the rate of 2% a year and is payable on 31 December 2004 and 2005 on the balance outstanding in the previous 12 months. The market rate of interest on loans of equivalent risk and maturity is 6% a year.

Required

(a) How should Mapletel account for the Eco equipment sale and financing? Show, via journal entries or the balance sheet equation, the effect of the contract on Mapletel's accounts at the time of sale in late 2003 and at the end of 2004 and 2005?

(b) Eco experiences liquidity problems in 2004. At the end of the year, Mapletel agrees to defer col- lection of the annual instalments by one year - to end 2005 and 2006, respectively. Interest continues to accrue at the rate of 2% a year and is payable at the end of each year of the revised agreement (2004-06) on the balance outstanding in the previous 12 months. To secure equivalent financing, Eco would have to pay 12% a year. What is the effect of the receivable restructuring on Mapletel's 2004 accounts? Assume Eco has paid 2004 interest (of 10) to Mapletel by the end of 2004.