chapter 7 examples september 2003 september 2003
TRANSCRIPT
CHAPTER 7 EXAMPLES CHAPTER 7 EXAMPLES
September 2003September 2003
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000
Maturity value $10,000 Maturity value $10,000 Matures on Matures on December 31, 2003December 31, 2003
Market rate of interest 9%Market rate of interest 9%
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
n = 3 yearsn = 3 yearsi = 9%i = 9%fv = $10,000fv = $10,000pv = ?pv = ?
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
12-31-00 Note receivable12-31-00 Note receivable 10,00010,000
Discount on noteDiscount on note 2,278 2,278Sales revenueSales revenue 7,722 7,722
To record sale for note to Customer SmithTo record sale for note to Customer Smith
Note ReceivableNote Receivable
10,00010,000
DiscountDiscount
2,2782,278
SalesSales
7,7227,722
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
12-31-01 Discount on note12-31-01 Discount on note 695695
Interest incomeInterest income 695 695
To record interest on note for 2001 To record interest on note for 2001 ( $7,722 X 9%)( $7,722 X 9%)
Note ReceivableNote Receivable
10,00010,000
DiscountDiscount
695695 2,278 2,278
1,5831,583
Interest incomeInterest income
695695
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
12-31-02 Discount on note12-31-02 Discount on note 758758
Interest incomeInterest income 758 758
To record interest on note for 2002 To record interest on note for 2002 ( $8,417 X 9%)( $8,417 X 9%)
Note ReceivableNote Receivable
10,00010,000
DiscountDiscount
758758 1,583 1,583
825825
Interest incomeInterest income
758758
NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE
12-31-03 Cash12-31-03 Cash 10,00010,000
Discount on noteDiscount on note 825 825
Note receivable 10,000Note receivable 10,000 Interest income Interest income 825 825
To record maturity of & interest on note To record maturity of & interest on note ( $9,175 X 9%)( $9,175 X 9%)
Note ReceivableNote Receivable
10,00010,000 10,000 10,000
00
DiscountDiscount
825825 825 825
00
Interest incomeInterest income
825825
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000
Principal $100,000Principal $100,000Stated interest of 8% Stated interest of 8% Matures on December 31, 2003Matures on December 31, 2003Market rate of interest 10%Market rate of interest 10%
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
n = 3 yearsn = 3 yearsi = 10%i = 10%fv = $100,000fv = $100,000pmt = $8,000pmt = $8,000pv = ?pv = ?
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
pv = $95,026pv = $95,026pv of single amountpv of single amount
of $100,000 = $75,131of $100,000 = $75,131pv of annuity of $8,000 = $19,895pv of annuity of $8,000 = $19,895$75,131 + 19,895 = $95,026$75,131 + 19,895 = $95,026
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
12-31-00 Note receivable12-31-00 Note receivable 100,000100,000
Discount on noteDiscount on note 4,974 4,974Sales revenueSales revenue 95,026 95,026
To record sale for note to Customer SmithTo record sale for note to Customer Smith
Note ReceivableNote Receivable
100,000100,000
DiscountDiscount
4,9744,974
SalesSales
95,02695,026
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
12-31-01 Cash 8,00012-31-01 Cash 8,000
Discount on noteDiscount on note 1,5031,503
Interest incomeInterest income 9,503 9,503
To record interest on note for 2001 To record interest on note for 2001 ( $95,026 X 10%)( $95,026 X 10%)
Note ReceivableNote Receivable
100,000100,000
DiscountDiscount
1,5031,503 4,974 4,974
3,4713,471
Interest incomeInterest income
9,5039,503
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
12-31-02 Cash 8,00012-31-02 Cash 8,000
Discount on noteDiscount on note 1,653 1,653
Interest incomeInterest income 9,653 9,653
To record interest on note for 2002 To record interest on note for 2002 ( $96,529 X 10%)( $96,529 X 10%)
Note ReceivableNote Receivable
100,000100,000
DiscountDiscount
1,6531,653 3,471 3,471
1,8181,818
Interest incomeInterest income
9,6539,653
INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE
12-31-03 Cash12-31-03 Cash 108,000 108,000
Discount on noteDiscount on note 1,818 1,818
Note receivable 100,000Note receivable 100,000 Interest income Interest income 9,818 9,818
To record maturity of & interest on note To record maturity of & interest on note ( $98,182 X 10%)( $98,182 X 10%)
Note ReceivableNote Receivable
100,000 100,000100,000 100,000
00
DiscountDiscount
1,818 1,818 1,818 1,818
00
Interest incomeInterest income
9,8189,818
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000
Maturity value of $5,000Maturity value of $5,000Stated interest of 12% Stated interest of 12% Matures in 90 daysMatures in 90 days
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
12-31-00 Note receivable12-31-00 Note receivable 5,0005,000
Sales revenueSales revenue 5,000 5,000To record sale for note to Warren PeaceTo record sale for note to Warren Peace
Note ReceivableNote Receivable
5,0005,000
SalesSales
5,0005,000
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
1-31-01 Interest receivable1-31-01 Interest receivable 5050
Interest incomeInterest income 50 50
To record interest on note for January To record interest on note for January ($5,000 X 12% X 30/360)($5,000 X 12% X 30/360)
Note ReceivableNote Receivable
5,0005,000
Interest Interest receivable receivable
5050
Interest incomeInterest income
5050
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
Discount note at bank at 14% on 1- 31-01Discount note at bank at 14% on 1- 31-01Face value of note Face value of note $5,000$5,000
Interest due at maturity at 12% Interest due at maturity at 12% 150150
Maturity value Maturity value 5,150 5,150
Discount (5,150 X 14% X 60/360) Discount (5,150 X 14% X 60/360) 120120
Total proceeds Total proceeds 5,030 5,030
Book value Book value 5,0505,050
Loss on discounting note Loss on discounting note $ 20$ 20
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
1-31-01 Cash1-31-01 Cash 5,030 5,030
Loss from discounting noteLoss from discounting note 20 20
Notes receivable discounted 5,000Notes receivable discounted 5,000
Interest receivableInterest receivable 50 50
To record loss on discount of noteTo record loss on discount of note
Note ReceivableNote Receivable
5,0005,000
Note Note discounteddiscounted
5,0005,000
Loss from note Loss from note discountingdiscounting
2020
DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE
PRESENTATION ON BALANCE SHEETPRESENTATION ON BALANCE SHEET
NOTES RECEIVABLENOTES RECEIVABLE 5,0005,000
NOTES RECEIVABLE DISCOUNTED NOTES RECEIVABLE DISCOUNTED (5,000)(5,000)
NOTES RECEIVABLE, NET 0NOTES RECEIVABLE, NET 0
OR DISCLOSE CONTINGENT LIABILITY IN NOTEOR DISCLOSE CONTINGENT LIABILITY IN NOTE
IF NOTE RECEIVABLEIF NOTE RECEIVABLEHONOREDHONORED
NOTES RECEIVABLE DISCOUNTED 5,000NOTES RECEIVABLE DISCOUNTED 5,000
NOTES RECEIVABLENOTES RECEIVABLE 5,000 5,000
IF NOTE RECEIVABLEIF NOTE RECEIVABLEDISHONOREDDISHONORED
NOTES RECEIVABLE DISCOUNTED 5,000NOTES RECEIVABLE DISCOUNTED 5,000
NOTES RECEIVABLE DISHONORED 5,180NOTES RECEIVABLE DISHONORED 5,180
NOTES RECEIVABLENOTES RECEIVABLE 5,000 5,000
CASHCASH 5,180 5,180
($5,150 MATURITY VALUE + $30 BANK FEE = $5,180)($5,150 MATURITY VALUE + $30 BANK FEE = $5,180)
ASSIGNING/PLEDGINGASSIGNING/PLEDGINGSeparate borrowing from Separate borrowing from
receivables in your mindreceivables in your mindJust a loanJust a loanJust normal receivablesJust normal receivablesBUTBUT cash from receivables cash from receivables
pays down the loan principalpays down the loan principal
FACTORINGFACTORINGYou sold an asset (just like equipment)You sold an asset (just like equipment)Total of receivables soldTotal of receivables soldCash proceeds receivedCash proceeds receivedAmount withheld “DUE FROM Amount withheld “DUE FROM
FACTOR” (Cushion for factor)FACTOR” (Cushion for factor)Additional liability “RECOURSE Additional liability “RECOURSE
LIABILITY” (LIABILITY” (MoreMore cushion!) cushion!)Loss on sale Loss on sale
FACTORINGFACTORING
The Factor calls the shotsThe Factor calls the shotsVery expensive way to get cashVery expensive way to get cashVery poor liquidityVery poor liquidityYou need the factor but he You need the factor but he
doesn’t need youdoesn’t need you