Receivables

Question 1

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485.

Answer 1

Total interest revenue is the amount received over the term of the note less the PV of the note:

(5*5009)-19485 = $5,560

It is the difference between total note amount and PV. The interest is built implied.

Question 2

Valuation at present value

Answer 2

Notes valuation at present value is of the remaining payments at the original discount rate.

Question 3

Cash Generating Unit

Answer 3

Under IFRS, the smallest group of assets that generates independent cash flows from continuing use.

Question 4

Interest Method

Answer 4

Recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded.

Question 5

Cost Recovery Method

Answer 5

Recognizes interest revenue only after cash equal to the new carrying value is collected.

Question 6

Impairment of a Note

Answer 6

When a note is considered to be impaired if the present value of the remaining cash flows is less than book value, using the rate in the note. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.