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Notes On Note Receivable

Notes receivable are supported by a formal promissory note that is a negotiable instrument signed by the maker in favor of the payee and may bear interest. Notes receivable generally originate from customers extending payment periods, new customers, loans to employees and subsidiaries, or property sales. Short-term notes are recorded at face value less any allowance, while long-term notes are recorded at present value of expected cash flows using the effective interest method.

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John Cedfrey Narne
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123 views

Notes On Note Receivable

Notes receivable are supported by a formal promissory note that is a negotiable instrument signed by the maker in favor of the payee and may bear interest. Notes receivable generally originate from customers extending payment periods, new customers, loans to employees and subsidiaries, or property sales. Short-term notes are recorded at face value less any allowance, while long-term notes are recorded at present value of expected cash flows using the effective interest method.

Uploaded by

John Cedfrey Narne
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Notes on Note Receivable

RECOGNITION OF NOTES RECEIVABLE


Notes Receivable
 Supported by a formal promissory note
o Negotiable instrument
o Maker signs in favor of payee
o Interest-bearing (has a stated rate of interest) OR
o Non-interest bearing (interest included in face amount)

 Generally originated from:


o Customers who need to extend the payment period of an
outstanding receivable
o New customers
o Loans to employees and subsidiaries
o Sales of property, plant, and Equipment
o Lending transactions (the majority of notes)

Short-term notes – Recorded at Face Value, less allowance


Long-term notes – Recorded at Present Value of cash expected to be collected
(recorded at amortized cost)
Additional Notes:
*Stated rate (Face rate/Nominal rate)
*Market rate (Yield rate/ Effective rate)
Effective Interest method are commonly used in accounting

Interest Rates Notes issued at


Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount
Present value of an Future cash flows are in equal PVAD=P ¿
annuity due installment. 1st installment made
immediately
Initial Record:

Notes Receivable 100,000

Cash 100,000

(End of year) 5 Periodic Records:

Cash 8,000

Interest Income 8,000

Maturity date:

Cash 100,000

Notes Receivable 100,000

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