Notes Receivable Flashcards
What is the key reporting issue for Notes Receivable?
Valuation of the note (at present value) and how to recognize interest revenue (interest method)
Who is the buyer or borrower of a note?
The maker of the note (The debtor firm or individual). They make an unconditional promise to pay principal and interest over the note term.
Who is the seller or lender of a note?
The holder of the note. They are the creditor and the firm recording the note receivable on its books.
Do all notes have an interest element?
Yes, an interest bearing note has a stated rate, while a non-interest bearing note, the interest is included in the face value of the note.
What do notes typically result from?
Sale of property, conversion of accounts receivable, and lending transactions
At what value should a note receivable be recorded?
The present value of all future cash flows
Define “market rate”.
Interest rate used to determine the present value of a note receivable. If this is equal to the stated rate of a note, then there is no discount
How is the present value in a noncash transaction determined?
The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.
How is the present value in a cash transaction determined in relation to a note receivable?
The amount of cash that exchanged hands on the date of the note creation.
