For UC Berkeley Extension Berkeley, CA By Anna N. Lee. Notes Receivable . Interest Bearing Notes. Interest Bearing Notes . Notes Receivable. Rights to receive a specified amount of cash, either on demand or at a definite future date.
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Anna N. Lee
Interest Bearing Notes
Rights to receive a specified amount of cash, either on demand or at a definite future date.
A negotiable instrument; signed by maker, received by payee.
Interest-bearing (has a stated rate of interest), OR
Zero-interest-bearing (interest included in face amount).
Reasons for Accepting a Note:
$1,000 x 3.16986 = $3,170
$10,000 x .68301 = $6,830
Illustration: January 1, 2012, Good Neighbor Corp. makes a loan to Needy Co. and receives in exchange a four-year, $10,000 note at stated interest of 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Good Neighbor record the receipt of the note?
N (period) = 4
i = 12%
$1,000 x 3.03735 = $3,037
$10,000 x .63552 = $6,355
9,392 = 3,037 + 6,355 PV or Note Carrying Amount
a $1,000 = $10,000 x 10% b $9,392 x 12% = $1,127 c $9,392 + $127 = $9,519
Illustration: Calculation Presentation
Journal Entries for Interest-Bearing note
Present value of the note: $9,392 (see slides 5 & 6)
less allowance (similar to Accounts Receivable)
of expected cash flows (loss is treated the same with short-term receivables
Stated rate = Market rate
Stated rate > Market rate
Stated rate < Market rate
Note Issued at
Illustration (Cost basis):
Notes Receivable (Loans) 800,000
Allowance for Note (Loan) Losses 100,000
Net Notes Receivable (carrying amount) 700,000
Illustration (using fair value option): At December 31, 2012, Gracious Lady Company has notes receivable that have a fair value of $500,000 and a carrying amount of $700,000, Gracious Lady decides to use the fair value option for these receivables. This is the first valuation (the original year the instrument is recognized) of these recently acquired receivables. At December 31, 2012, Gracious Lady makes an adjusting entry to record the decrease in value of Notes Receivable and to record the unrealized holding loss, as follows:
Notes Receivable (or Fair Value Adjustment) 200,000
(If your holding is less than 20%, and if it is a trading security, UHGL is reported in Income Statement; if it is available for sale security, UHGL is reported in Balance Sheet as Other Comprehensive Income, a separate component).
Unrealized Holding Gain or Loss (UHGL) - Income 200,000