FAR 10.03 - INTEREST ON RECEIVABLES Flashcards
FAR 10.03 - INTEREST ON RECEIVABLES
On August 15, 20X1, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The four-month note was dated July 15, 20X1. Note principal, together with all interest, is due November 15, 20X1.
When the note was recorded on August 15, which of the following accounts increased?
Prepaid interest.
Unearned discount.
Interest revenue.
Interest receivable.
Interest receivable.
EXPLANATION:
Since Benet is receiving a note dated 7/15/X1 on 8/15/X1, the note will already have accrued interest for one month.
Ben will recognize the face amount of the note and the interest accrued as the sales price of the goods sold. It will be recorded with the following entry:
DR: Note Receivable (face)
DR: Interest Receivable (1 month interest)
CR: Sales (total)
When the note is collected, it will include 4 month’s interest. It will be recorded as follows:
DR: Cash
CR: Note Receivable (face)
CR: Interest Receivable (1 month’s interest)
CR: Interest Revenue (three month’s interest)
FAR 10.03 - INTEREST ON RECEIVABLES
Misk, Inc. received from a customer a one year, $750,000 note bearing annual interest of 9%. After holding the note for six months, Misk discounted the note at National Bank at an effective interest rate of 12%.
What amount of cash did Mick receive from the bank?
$719,400
$780,713
$768,450
$700,950
$768,450
EXPLANATION:
Misk will first calculate the maturity value of the note, which will be the face value of $750,000 plus one year’s interest at 9% or $67,500. Since the note is being discounted after 6 months, the bank will receive $817,500 after six months.
The discount will be $817,500 X 12% X 6/12 or $49,050. As a result, Misk will receive $817,500 - $49,050 or $768,450 from the bank.
FAR 10.03 - INTEREST ON RECEIVABLES
On July 1, year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, year 1 and year 2. On July 1, year 2, Kay discounted the note at a bank at an interest rate of 12%.
Kay’s proceeds from the discounted note were
$50,350
$51,700
$49,350
$48,400
$51,700
EXPLANATION:
As of July 1, year 2, the first payment and the first year’s interest would have been received. As a result, the remaining principal balance was $50,000.
The bank will receive payment on the note at December 31, year 2, consisting of the principal balance plus interest for 1 year at 10%, or $5,000, for a total of $55,000.
The discount will be $55,000 x 12%, the discount rate x 6/12, the portion of a year until the bank is paid, resulting in a discount of $3,300.
As a result, proceeds from the discounted
note will be $55,000 - $3,300 or $51,700.
FAR 10.03 - INTEREST ON RECEIVABLES
A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the note receivable discounted account should be…
Increased by the face amount of the note
Decreased by the face amount of the note
Increased by the proceeds from the discounting transaction
Decreased by the proceeds from the discounting transaction
Increased by the face amount of the note
EXPLANATION:
When a note receivable is sold with recourse, it is treated as if the entity borrowed funds from the bank, using the
receivable as collateral.
In such a case, the proceeds are recognized as a liability, and the receivable is reclassified, decreasing notes receivable and increasing notes receivable discounted.
FAR 10.03 - INTEREST ON RECEIVABLES
Jole Co. lent $10,000 to a major supplier in exchange for a non interest bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record…
Discount on note receivable only.
Neither discount on note receivable nor deferred charge.
Deferred charge only.
Both discount on note receivable and deferred charge.
Both discount on note receivable and deferred charge.
EXPLANATION:
Notes receivable should be recorded at present value. Since $10,000 is due 3 years from the date of issuance, a discount on the note receivable is recorded.
The deferred charge is a prepaid expense that is treated as an asset on a balance she and is carried forward until used.
In this exchange agreement, Jole Co. received a 10% discount on the future purchase a fixed amount of merchandise from the supplier from the list market price over the next three years, which is a prepaid expense. Jolewould record this as a deferred charge.
FAR 10.03 - INTEREST ON RECEIVABLES
Frame Co. has an 8% note receivable dated June 30, 20X1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 20X2, 20X3, and 20X4.
In its June 30, 20X3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?
$8,000
$4,000
$12,000
$0
$8,000
EXPLANATION:
As of 6/30/X3, Frame will have received one principal payment of $50,000 on 7/1/X2, reducing the balance of the note to $100,000. Interest for the period from 7/1/X2 to 6/30/X3 will be $100,000 x 8% = $8,000, which would be reported as a current asset on the 6/30/X3 balance sheet.
