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Notes receivable
discounted
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If the holder of
the note needs to get cash now, instead of waiting for the due date of
the note, the note can be sold to other party at a discounted price.
An example
On October 1, 20X1, Entity A sold the products and received a
promissory note with $200,000 face amount, due on June 30, 20X2.
Interest will be paid on due date at 2% annual rate.
Journal entries
October 1, 20X1
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Debit
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Credit
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Notes
receivable
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200,000
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|
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Sales
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200,000
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December 31, 20X1
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Debit
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Credit
|
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Interest
receivable
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1,000
|
|
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Interest revenue
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1,000
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Interest revenue
for 3 months = $200,000 x 2% x 3/12 = $1,000
On January 1, 20X2, Entity A sold the note receivable at the price of
$198,000.
January 1, 20X2
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Debit
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Credit
|
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Cash
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198,000
|
|
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Loss on sale
of notes receivable
|
3,000
|
|
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Notes receivable
|
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200,000
|
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Interest receivable
|
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1,000
|
|
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Discount rate
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An example
On March 1, 20X1, Entity A received products and received a promissory
note, with $300,000 face amount due on September 30, 20X1. The note is
an interest bearing note with 4% interest payable on due date.
Journal entries
March 1, 20X1
|
|
Debit
|
Credit
|
|
Notes
receivable
|
300,000
|
|
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Sales
|
|
300,000
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On March 1, 20X1, Entity A sold the note at the 10% discount rate.
10% discount rate is applied to the maturity value of the note
on September 30, 20X1.
Maturity value =
$300,000 + ($300,000 x 4% x 6/12)
=
$300,000 + $6,000 = $306,000
Discount = Maturity
value x discount rate
=
$306,000 x 10% = $30,600
Cash received at
the time of discounting
=
Maturity value - discount
=
$306,000 - $30,600 = $275,400
March 1, 20X1
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Debit
|
Credit
|
|
Cash
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275,400
|
|
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Loss on sale
of notes receivable
|
24,600
|
|
|
Notes receivable
|
|
300,000
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Loss on sale of
notes receivable = $300,000 - $275,400 = $24,600
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