8.01 Notes Receivable Flashcards
Noninterest bearing notes receivable in exchange for merchandise sold
Issuing the loan
Dr Notes Receivable (FV) $10,000
Cr Discount on Note Receivable $2,487
Cr Sales revenue* $7,513
*$10,000 x Present Value of 1, n=3, i=10%
Year 1, year end adjusting entry
Dr Discount on Notes Receivable $751
Cr Interest Revenue $751
*$7,513x10%
Year 2, year end adjusting entry
Dr Discount on Notes Receivable $751
Cr Interest Revenue $751
*$7,513x10%
Year 3, year end adjusting entry
Dr Discount on Notes Receivable $751
Cr Interest Revenue $751
*$7,513x10%
Receipt of cash upon note maturity
Dr Cash $10,000
Cr Note Receivable $10,000
Record the discounting with recourse of a $50,000 8% two-year note receivable, discounted at 10% after one year.
Accrued interest for 1 year $50x8%
Dr Interest Receivable $4,000
Cr Interest Revenue $4,000
Dr Cash matur. Value-discount $52,200
Dr Loss on discounting notes receivable $1,800
Cr NR discounted FV $50,000
Cr Interest Receivable $4,000
Face value of NR $50,000
+ interest at maturity $8,000
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Maturity Value $58,000
- Bank’s discount 58x10%x1y ($5,800)
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Net cash proceeds $52,200
*because the NR was discounted with recourse, the company will record a $50,000 note receivable discounted ( a contract account) and disclose the $58,000 MV in the footnotes as a contingent liability.
Receivable not incurred in the ordinary course of business are recorded at present value. When the interest rate is not considered fair, the receivable is discounted at a fair interest rate. The interest component can be ignored, and the note recorded at face value, if the receivable is collectible within a year and customary trade terms are used. (Record at the cash received)
Co received two $10,000 notes receivable from customer. On both interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. One note made under customary trade terms- (record as $10,000) due in nine months.
Second, is due in five years. Market interest rate for similar notes on Dec 31 was 8%. The factors are as follow:
PV* of $1 due in five years at 8% - .680
*not the FV factor
What amount would be reported in financial statement?
1. Note #1 - $10,000
2. Note #2
FV $10,000
Interest payable at maturity $1,500
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Maturity value $11,500
PV factor (single sum, 8%) x .680
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PV $7,820
!!! Why not $10,000 x .680 factor
A Note Receivable typically has two components: principal (FV) and interest.
A noninterest bearing note is one that does not have a stated annual rate of interest but does bear interest because a lender (seller) expects the borrower (customer) to pay for the use of its money (interest).
When the noninterest bearing note is issued, the interest is recorded as a contra account called Discount on NR. It is calculated as the difference between the FV of the note and its PV based on the market rate of interest.
PV payment x present value factor
Noninterest bearing notes receivable in exchange for merchandise sold
Dr Notes Receivable (face amount)
Cr Discount on notes receivable
Cr Sales revenue
Year end adjusting entry
Dr Discount on notes receivable
Cr Interest revenue
The discount on NR is amortized at year end using the effective interest method over the life of the note. The amortization reduces (debit) the discount and increases (credit) interest revenue. When the NR matures the borrower pays cash to the seller for the face amount of the note. The buyer, not the seller, records interest expense.
Journal entry to record noninterest bearing notes receivable receivable for equipment sold
Dr NR (FV) $600
Dr Loss on sale (plug) $30
Cr Discount on NR (calculated) $150
Cr Equipment (carrying amount) $480
Face value $600
Less: PV of NR (PVxPV factor) (600 x .75) $150
Amortization discount:
(600-150) x 10% x 12/12 $45
Noninterest bearing notes receivable, calculating discount:
Face Value of note receivable $100
Less: PV factor x payments (80)
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Discount on Note Receivable $20
Amortization discount:
($100 - 20) x 8% x 12/12 =1
Noninterest bearing notes receivable may be used when selling goods or providing services. It is recorded at FMV of goods or services or the FMV of the Note Receivalbe, whichever is more determinable. If neither is known, present value of the future payments is used.
Although an interest rate is not stated, interest is imply in the face value of the note. The implied interest is the difference between face value and PV, and it is recorded as a contra account called Discount on NR. The discount is then amortized (using the effective interest rate method) over the life of the note based on the NR’s carrying value.
That is also Note Receivable a contractual agreement between a creditor and a debtor to pay a specific amount at a future date . The note receivable is recorded at FV on the day of sale. Records interest accruals for each accounting periods.
on December 31:
Dr Interest Receivable
Cr Interest Revenue
NR matures on Feb 28
Dr cash
Cr Interest Receivable
Cr Interest Revenue (remaining 2 months interest)
Cr Note Receivable (FV)
Nonbearing interest note
Co. can carry the note at either of the 2:
1. Cash selling price FMV of the goods, this is the price Co. charges for sale to customers who pays in full on the date of sale
2. Present Value of future payments: this is a future cash flows of the receivable discounted at a fair interest rate.
Dr Note Receivable
Cr discount on note
Cr Sales ($50x.7513) present value of the receivable
There is an Amortization schedule to get to the face value.
Interest bearing note
If a note is issued at the market rate, the PV of the note is the same as the Face Value.
accrued interest on Noninterest bearing note
Face Value on note
x Interest rate
x number of months elapsed
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Accrued Interest
If the interest rate on the note is different then the market rate, the PV of the note will differ from the face value.
Note is recorded at PV.
Discount or premium recorded for difference between PV and Face value.
Discount or premium amortized over time as interest is earned.
Co received a one year $500 note bearing annuity interest of 8%. After six months, Co discounted at bank at an effective rate of 10%. What amount will Co receive from the bank?
Face value on NR $500
+ interest at maturity 500x8%x12/12 $40
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Maturity Value $540
- bank discount 540x10%x6/12 $27
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Net cash proceeds $513
Record interest earned prior to discounting the note
Dr interest receivable $20
Cr interest revenue $20*
*accrued interest for 6 months 500x8%x6/12
Record discounting notes receivable (assume without recourse)
Dr cash maturity-discount $513
Dr loss on discounting notes receivable $7
Cr notes receivable FV $500
Cr interest receivable $20
Interest bearing note
If a note is issued at the market rate, the PV of the note is the same as the Face Value.
accrued interest on Noninterest bearing note
Face Value on note
x Interest rate
x number of months elapsed
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Accrued Interest
If the interest rate on the note is different then the market rate, the PV of the note will differ from the face value.
Note is recorded at PV.
Discount or premium recorded for difference between PV and Face value.
Discount or premium amortized over time as interest is earned.
**Note Receivable is carried at present value PV of payment discounted at the fair (market) rate of interest when;
1. Issued in exchange for services rendered
2. Trade terms not customary
3. Interest rate is unreasonable or not stated ie. noninterest bearing
If NR is short term it’s classified as a current asset and recorded at face value ie. ignoring interest.
Anything that is notated as being made under “customary” terms should be listed at the face value of the note. So you can disregard the present value number given in that case.
1. Nine month NR is made under customary trade term, it’s reported at the face value
2. NR is a long term, Noninterest bearing note with trade terms that are not customary, based on the PV using the fair rate of interest ie. 8% ($10 face x 0.857 preset value factor)
“A difference is that Jet and Maxx is a note receivable with an annual interest rate of 3% and as such, you will need to correct the maturity value for Maxx to reflect the current face value PLUS the interest over the term (10000+(100003%5 years))*Present Value factor.
You wouldn’t need to do this for Key for A and O because the notes are non-interest bearing.”
