Financial Accounting Terms Dictionary

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Financial Accounting Terms
Notes Receivable


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Notes Receivable
  

Notes receivable

Receivable represented by promissory notes
Promissory notes indicate the face amount and due date.
Two types of notes receivable
   Interest-bearing note
   Noninterest-bearing note
 

Interest bearing note

Holder of the note will receive interest payment in addition to the face amount of the note.
 

Noninterest bearing note

Holder of the note will receive the face amount only on due date.
 

Imputation of interest revenue

If the note does not pay interest or interest rate is lower than usual, holder of the note should recognize imputed interest revenue.
 
An example
On July 1, 20X1, Entity A loaned $200,000 cash and received a promissory note with the face amount of $210,000 due on June 30, 20X2.
In this case, $10,000 (= $210,000 - $200,000) is recognized as interest revenue.
 
Journal entries
   July 1, 20X1

 

Debit

Credit

Notes receivable

210,000

 

      Cash

 

200,000

      Unearned interest revenue

 

10,000


   December 31, 20X1

 

Debit

Credit

Unearned interest revenue

5,000

 

      Interest revenue

 

5,000


   Interest revenue for 6 months = $10,000 x 6/12 = $5,000
     
   June 30, 20X2

 

Debit

Credit

Cash

210,000

 

      Notes receivable

 

210,000

 

 

Debit

Credit

Unearned interest revenue

5,000

 

      Interest revenue

 

5,000

  


      


 
 

Notes receivable discounted

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

 

Debit

Credit

Notes receivable

200,000

 

      Sales

 

200,000


   December 31, 20X1

 

Debit

Credit

Interest receivable

1,000

 

      Interest revenue

 

1,000

 
   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

 

Debit

Credit

Cash

198,000

 

Loss on sale of notes receivable

3,000

 

      Notes receivable

 

200,000

      Interest receivable

 

1,000

   

Discount rate

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

 

      Sales

 

300,000

 
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

 

Debit

Credit

Cash

275,400

 

Loss on sale of notes receivable

24,600

 

      Notes receivable

 

300,000

  
   Loss on sale of notes receivable = $300,000 - $275,400 = $24,600
  

        





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 860-20 Sale of Financial Assets, SFAS 166 
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 985-20 Costs of software to be sold  

 



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