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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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Presentation Transcript
slide1

For

UC Berkeley

Extension

Berkeley, CA

By

Anna N. Lee

Notes Receivable

Interest Bearing Notes

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.

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).

notes receivable
Notes Receivable

Reasons for Accepting a Note:

  • to extend payment period of an outstanding receivable (from an overdue customer).
  • to sell products or services to High-risk or new customers.
  • to make a loan to employees and subsidiaries.
  • to sell property, plant, and equipment.
  • to lend money to borrowers (the majority of notes).
slide4

Present Value Table

$1,000 x 3.16986 = $3,170

Present Value

Interest Received

Factor

.90909

.82645

.75132

.68301

3.16986

$10,000 x .68301 = $6,830

Principal

Factor

Present Value

slide5

Note Not Issued at Face Value Interest-Bearing Note

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?

$10,000 Principal

N (period) = 4

i = 12%

1,000 Interest

1,000

$1,000

1,000

1

2

3

4

slide6

Note Not Issued at Face Value Interest-Bearing Notes (continued)

$1,000 x 3.03735 = $3,037

Interest Received

Factor

Present Value

$10,000 x .63552 = $6,355

Principal

Factor

Present Value

9,392 = 3,037 + 6,355 PV or Note Carrying Amount

slide7

Note Not Issued at Face Value Interest-Bearing Note (continued)

b

c

a

a $1,000 = $10,000 x 10% b $9,392 x 12% = $1,127 c $9,392 + $127 = $9,519

note not issued at face value interest bearing note continued
Note Not Issued at Face ValueInterest-Bearing Note (continued)

Illustration: Calculation Presentation

slide9

Note Not Issued at Face Value Interest-Bearing Note (continued)

Journal Entries for Interest-Bearing note

Present value of the note: $9,392 (see slides 5 & 6)

slide10

Recognizing Notes Receivable

Short-Term

Long-Term

Record at

Face Value,

less allowance (similar to Accounts Receivable)

Record at

Present Value

of expected cash flows (loss is treated the same with short-term receivables

Interest Rates

Stated rate = Market rate

Stated rate > Market rate

Stated rate < Market rate

Note Issued at

Face Value

Premium

Discount

slide11

Recognizing Notes Receivable (continuation)

Illustration (Cost basis):

9/30/12

Notes Receivable (Loans) 800,000

Allowance for Note (Loan) Losses 100,000

Net Notes Receivable (carrying amount) 700,000

valuation of notes receivable continued
Valuation of Notes Receivable(continued)

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

valuating notes receivable
Valuating Notes Receivable
  • Short-Term reported at Net Realizable Value (same as accounting for accounts receivable).
  • Long-Term- FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements.
    • Fair Value Option.Recently, the FASB has given companies the option to use fair value as the basis of measurement for financial instruments including receivables, in the financial statements.