Accounts Receivable
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Accounts Receivable. Generally, two major issues:. How to Record Sales Discounts. Accounts Receivable. Generally, two major issues:. How to Record Sales Discounts How to Record Doubtful Receipts. Accounts Receivable. Discounts.

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Accounts receivable

Accounts Receivable

Generally, two major issues:

  • How to Record Sales Discounts


Accounts receivable

Accounts Receivable

Generally, two major issues:

  • How to Record Sales Discounts

  • How to Record Doubtful Receipts


Accounts receivable

Accounts Receivable

Discounts

The most prevalent is the cash discount for early payment on the account.


Accounts receivable

Accounts Receivable

Discounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30


Accounts receivable

Accounts Receivable

Discounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30

2% discount if paid within 10 days


Accounts receivable

Accounts Receivable

Discounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30

Net amount due in 30 days.


Accounts receivable

Accounts Receivable

Discounts

Two methods to record the discount:

  • Gross Method: record primary sale at gross amount


Accounts receivable

Accounts Receivable

Discounts

Two methods to record the discount:

  • Gross Method: record primary sale at gross amount

Usually for firms whose clients generally don’t take advantage of the discounts


Accounts receivable

Accounts Receivable

Discounts

Two methods to record the discount:

  • Gross Method: record primary sale at gross amount

  • Net Method: record primary sale at net-of-discount amount


Accounts receivable

Accounts Receivable

Discounts

Two methods to record the discount:

  • Gross Method: record primary sale at gross amount

  • Net Method: record primary sale at net-of-discount amount

Usually for firms whose clients generally take advantage of the discounts


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1Accts Rec10,000

Sales10,000


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1Accts Rec10,000

Sales10,000

Recorded as if discount won’t be taken


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1Accts Rec10,000

Sales10,000

Net Method

Jan 1Accts Rec9,800

Sales9,800


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1Accts Rec10,000

Sales10,000

Net Method

Jan 1Accts Rec9,800

Sales9,800

Recorded as if discount will be taken


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 9th, receive payment within discount period


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9Cash9,800

Sales Discs200

Accts Rec10,000


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9Cash9,800

Sales Discs200

Accts Rec10,000

If the discount is actually realized, it is recorded upon receipt of the cash payment. Sales Discounts is a contra-revenue account.


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9Cash9,800

Sales Discs200

Accts Rec10,000

Net Method

Jan 9Cash9,800

Accts Rec9,800


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9Cash9,800

Sales Discs200

Accts Rec10,000

Net Method

Jan 9Cash9,800

Accts Rec9,800

Discount has already been recorded on sales date.


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 29th, receive payment outside discount period

Now assume instead that the payment was sent after the discount period expired.


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29Cash10,000

Accts Rec10,000


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29Cash10,000

Accts Rec10,000

No correction needed, since we already assumed the discount would not be taken.


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29Cash10,000

Accts Rec10,000

Net Method

Jan 29Cash10,000

Accts Rec9,800

Forfeited Discount200


Accounts receivable

Accounts Receivable

Discounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29Cash10,000

Accts Rec10,000

Net Method

Jan 29Cash10,000

Accts Rec9,800

Forfeited Discount200

Record the forfeited discount (a revenue account).


Accounts receivable

Accounts Receivable

Doubtful Receipts

All receivables have some probability of default. The default on payment needs to be recorded appropriately.


Accounts receivable

Accounts Receivable

Doubtful Receipts

One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.


Accounts receivable

Accounts Receivable

Doubtful Receipts

One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.

Not considered an acceptable method because it does not match revenues with costs effectively.


Accounts receivable

Accounts Receivable

Doubtful Receipts

The accepted method is called the Allowance Method.


Accounts receivable

Accounts Receivable

Doubtful Receipts

The accepted method is called the Allowance Method.

An Allowance for Doubtful Accounts is set up as a contra-receivable account (contra-asset). It holds management’s best estimate for the amount of receivables that will default.


Accounts receivable

Accounts Receivable

Doubtful Receipts

To determine management’s best estimate for default, use one of two methods:


Accounts receivable

Accounts Receivable

Doubtful Receipts

To determine management’s best estimate for default, use one of two methods:

  • Percentage of Sales Method: a fixed percentage

  • of sales will be considered doubtful


Accounts receivable

Accounts Receivable

Doubtful Receipts

To determine management’s best estimate for default, use one of two methods:

  • Percentage of Sales Method: a fixed percentage

  • of sales will be considered doubtful

This is also called the income statement approach, since the estimate is based on a percentage of sales revenue.


Accounts receivable

Accounts Receivable

Doubtful Receipts

To determine management’s best estimate for default, use one of two methods:

  • Percentage of Sales Method: a fixed percentage

  • of sales will be considered doubtful

  • Percentage of Receivables Method: a fixed

  • percentage of the receivables balance will be

  • considered doubtful


Accounts receivable

Accounts Receivable

Doubtful Receipts

To determine management’s best estimate for default, use one of two methods:

  • Percentage of Sales Method: a fixed percentage

  • of sales will be considered doubtful

  • Percentage of Receivables Method: a fixed

  • percentage of the receivables balance will be

  • considered doubtful

This is also called the balance sheet approach, since the estimate is based on a percentage of a balance sheet receivable account.


Accounts receivable

Accounts Receivable

Doubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.


Accounts receivable

Accounts Receivable

Doubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

2000 Credit Sales:

0.70 x $200,000 = $140,000


Accounts receivable

Accounts Receivable

Doubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

2000 Credit Sales:

0.70 x $200,000 = $140,000

Estimate of doubtful collections:

0.04 x $140,000 = $5,600


Accounts receivable

Accounts Receivable

Doubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

Journal entry (percentage of sales):

Bad Debt Expense$5,600

Allowance for Doubtful Accts$5,600


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000

Accts Receivable End. Bal$440,000


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000

Accts Receivable End. Bal$440,000

$300,000 + $140,000 (70% of sales)


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000

Accts Receivable End. Bal$440,000

Required AFDA End. Bal$26,400

$440,000 x 6%


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000

Accts Receivable End. Bal$440,000

Required AFDA End. Bal$26,400

Required Entry to Adjust Allowance for doubtful accounts

(percentage of receivables method):

Bad Debt Expense$8,400

Allowance for Doubtful Accts$8,400


Accounts receivable

Accounts Receivable

Doubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal.$300,000

Allow. for doubtful Accts. Beg. Bal$18,000

Accts Receivable End. Bal$440,000

Required AFDA End. Bal$26,400

Required Entry to Adjust Allowance for doubtful accounts

(percentage of receivables method):

Bad Debt Expense$8,400

Allowance for Doubtful Accts$8,400

Need to add $8,400 to beginning balance to meet required ending balance.


Accounts receivable

Accounts Receivable

Sales Returns and Allowances

Returns and allowances are handled in the same manner as doubtful collection. An account called Allowance for Sales Returns is set up based on management’s best estimate for returns.


Accounts receivable

Notes Receivable

  • A written promise to pay

  • Usually longer-term and more formal

  • Usually for a stated amount and a specified period

  • Either formally stated or implicit interest rate


Accounts receivable

Notes Receivable

  • A written promise to pay

  • Usually longer-term and more formal

  • Usually for a stated amount and a specified period

  • Either formally stated or implicit interest rate

Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount.


Accounts receivable

Notes Receivable

  • A written promise to pay

  • Usually longer-term and more formal

  • Usually for a stated amount and a specified period

  • Either formally stated or implicit interest rate

Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount.

For example, a $1,000, 1-year note (with no stated interest rate) that sells for $900 has an implied interest rate of 11.1%.


Accounts receivable

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.


Accounts receivable

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value.


Accounts receivable

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value.

Short-term notes can be carried at face value, since they will likely not suffer from inflation.


Accounts receivable

Valuing Notes Receivable

To properly value long-term notes, we need the following information:


Accounts receivable

Valuing Notes Receivable

To properly value long-term notes, we need the following information:

  • Stated interest rate

  • Date of issue

  • Interest payment schedule

  • Principal payment schedule (usually end of note term)

  • Market interest rate for similar risk note (discount rate)


Accounts receivable

Valuing Notes Receivable

Using this information, do the following:


Accounts receivable

Valuing Notes Receivable

Using this information, do the following:

  • Set up repayment timeline.


Accounts receivable

Valuing Notes Receivable

Using this information, do the following:

  • Set up repayment timeline.

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.


Accounts receivable

Valuing Notes Receivable

Using this information, do the following:

  • Set up repayment timeline.

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Set up repayment timeline.


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$0

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$0

$0

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$0

$0

$0

$10,000


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

Assume discount rate = 7%.


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

1

1.07year

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

Assume discount rate = 7%.

Therefore, discount multiplier =


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

0 x 1/1.070


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

$0

$0


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

$0

$0

$0

$0

10,000 x 1/1.074


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$0

$0

$0

$10,000

$0

$0

$0

$0

$7,629


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

The journal entry to record this note is:


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable$10,000

Discount, Notes Rec.$2,371

Cash$7,629


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Set up repayment timeline.


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$900

$900

$900

$900

$10,000


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$900

$900

$900

$900

$10,000

9% x $10,000

of interest paid annually


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

$0

$900

$900

$900

$900

$10,000

Repayment of principal (stated amount) at the maturity of note


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

1

1.13year

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$900

$900

$900

$900

$10,000

Assume discount rate = 13%.

Therefore, discount multiplier =


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$900

$900

$900

$900

$10,000

$0

900 x 1/1.131


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$900

$900

$900

$900

$10,000

$0

$796


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$900

$900

$900

$900

$10,000

$0

$796

$705

$624

$6,685


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

  • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0

$900

$900

$900

$900

$10,000

$0

$796

$705

$624

$6,685

NPV = 796 + 705 + 624 + 6,685 = $8,810


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable$10,000

Discount, Notes Rec.$1,190

Cash$8,810


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

1

1.06year

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Now assume that inflation is low, so discount rate is only 6%.

$0

$900

$900

$900

$900

$10,000

Assume discount rate = 6%.

Therefore, discount multiplier =


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

$0

$900

$900

$900

$900

$10,000

$0

$849

$801

$756

$8,634


Accounts receivable

Year

0

Year

1

Year

2

Year

3

Year

4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

$0

$900

$900

$900

$900

$10,000

$0

$849

$801

$756

$8,634

NPV = 849 + 801 + 756 + 8,634 = $11,040


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable$10,000

Premium, Notes Rec.$1,040

Cash$11,040


Accounts receivable

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable$10,000

Premium, Notes Rec.$1,040

Cash$11,040

The premium reflects the amount we overpay in order to get a note with an interest rate that pays more than the inflation rate.


Accounts receivable

Notes Receivable

Amortization of Discount


Accounts receivable

Notes Receivable

Amortization of Discount

Go back to our 13% interest rate example:


Accounts receivable

Notes Receivable

Amortization of Discount

Go back to our 13% interest rate example:

Example: 4 year note; 9% stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable$10,000

Discount, Notes Rec.$1,190

Cash$8,810


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Year 1 amortization =


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Year 1 amortization = (8,810 x 0.13)


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Year 1 amortization = (8,810 x 0.13) - 900


Accounts receivable

Notes Receivable

Amortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable$10,000

Less: Discount$1,190

Carrying Value$8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Year 1 amortization = (8,810 x 0.13)– 900 = $245


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

So, we can set up an annual amortization table:


Accounts receivable

Notes Receivable

Amortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized)


Accounts receivable

Notes Receivable

Amortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized)

Journal entry to record receipt of year 1 interest:


Accounts receivable

Notes Receivable

Amortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized)

Journal entry to record receipt of year 1 interest:

Cash$900

Disc, Notes Rec$245

Interest Revenue, Notes Rec$1,145


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