notes receivable
DESCRIPTION
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. Notes Receivable. A written promise to pay Usually longer-term and more formal - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/1.jpg)
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
![Page 2: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/2.jpg)
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.
![Page 3: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/3.jpg)
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%.
![Page 4: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/4.jpg)
Notes Receivable
Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.
![Page 5: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/5.jpg)
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.
![Page 6: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/6.jpg)
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.
![Page 7: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/7.jpg)
Valuing Notes Receivable
To properly value long-term notes, we need the following information:
![Page 8: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/8.jpg)
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)
![Page 9: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/9.jpg)
Valuing Notes Receivable
Using this information, do the following:
![Page 10: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/10.jpg)
Valuing Notes Receivable
Using this information, do the following:
1. Set up repayment timeline.
![Page 11: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/11.jpg)
Valuing Notes Receivable
Using this information, do the following:
1. Set up repayment timeline.2. Plot actual cash inflows on timeline, using
stated interest rate and face value of the note.
![Page 12: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/12.jpg)
Valuing Notes Receivable
Using this information, do the following:
1. Set up repayment timeline.2. Plot actual cash inflows on timeline, using
stated interest rate and face value of the note.3. Discount plotted cash inflows using market
equivalent-risk rate of interest (discount rate).
![Page 13: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/13.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
![Page 14: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/14.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
1. Set up repayment timeline.
Year0
Year2
Year1
Year3
Year4
![Page 15: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/15.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0
![Page 16: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/16.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $0
![Page 17: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/17.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $0 $0
![Page 18: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/18.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0
![Page 19: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/19.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
![Page 20: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/20.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
Assume discount rate = 7%.
![Page 21: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/21.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
Assume discount rate = 7%.
Therefore, discount multiplier =1
1.07year
![Page 22: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/22.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
0 x 1/1.070
![Page 23: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/23.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
$0
![Page 24: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/24.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
$0 $0
![Page 25: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/25.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
$0 $0 $0 $0 10,000 x 1/1.074
![Page 26: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/26.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Year0
Year2
Year1
Year3
Year4
$0 $0 $0 $0 $10,000
$0 $0 $0 $0 $7,629
![Page 27: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/27.jpg)
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
The journal entry to record this note is:
![Page 28: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/28.jpg)
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 $10,000Discount, Notes Rec. $2,371Cash $7,629
![Page 29: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/29.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
![Page 30: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/30.jpg)
1. Set up repayment timeline.
Year0
Year2
Year1
Year3
Year4
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
![Page 31: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/31.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900 $900$10,000
![Page 32: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/32.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
9% x $10,000of interest paid annually
$900$10,000
![Page 33: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/33.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
Repayment of principal (stated amount) at the maturity of note
$900$10,000
![Page 34: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/34.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
Assume discount rate = 13%.
Therefore, discount multiplier =1
1.13year
$900$10,000
![Page 35: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/35.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
$0 900 x 1/1.131
$900$10,000
![Page 36: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/36.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
$0 $796
$900$10,000
![Page 37: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/37.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
$0 $796 $705 $624 $6,685
$900$10,000
![Page 38: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/38.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).
NPV = 796 + 705 + 624 + 6,685 = $8,810
$0 $900 $900 $900
$0 $796 $705 $624 $6,685
$900$10,000
![Page 39: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/39.jpg)
Valuing Notes Receivable
The journal entry to record a purchase of this note for cash is:
Notes Receivable $10,000Discount, Notes Rec. $1,190Cash $8,810
Example: 4 year note; 9% stated interest; $10,000 face value
![Page 40: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/40.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
Now assume that inflation is low, so discount rate is only 6%.
Assume discount rate = 6%.
Therefore, discount multiplier =1
1.06year
$900$10,000
![Page 41: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/41.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
$0 $849 $801 $756 $8,634
$900$10,000
![Page 42: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/42.jpg)
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
Year0
Year2
Year1
Year3
Year4
$0 $900 $900 $900
$0 $849 $801 $756 $8,634
$900$10,000
NPV = 849 + 801 + 756 + 8,634 = $11,040
![Page 43: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/43.jpg)
Valuing Notes Receivable
The journal entry to record a purchase of this note for cash is:
Notes Receivable $10,000Premium, Notes Rec. $1,040
Cash $11,040
Example: 4 year note; 9% stated interest; $10,000 face value
![Page 44: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/44.jpg)
Valuing Notes Receivable
The journal entry to record a purchase of this note for cash is:
Notes Receivable $10,000Premium, Notes Rec. $1,040
Cash $11,040
Example: 4 year note; 9% stated interest; $10,000 face value
The premium reflects the amount we overpay in order to get a note with an interest rate that pays more than the inflation rate.
![Page 45: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/45.jpg)
Notes ReceivableAmortization of Discount
![Page 46: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/46.jpg)
Notes ReceivableAmortization of Discount
Go back to our 13% interest rate example:
![Page 47: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/47.jpg)
The journal entry to record a purchase of this note for cash is:
Notes Receivable $10,000Discount, Notes Rec. $1,190Cash $8,810
Example: 4 year note; 9% stated interest; $10,000 face value
Notes ReceivableAmortization of Discount
Go back to our 13% interest rate example:
![Page 48: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/48.jpg)
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
![Page 49: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/49.jpg)
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
![Page 50: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/50.jpg)
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
![Page 51: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/51.jpg)
Carrying value x interest rate (discount rate) – interest actually paid
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
![Page 52: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/52.jpg)
Carrying value x interest rate (discount rate) – interest actually paid
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
Year 1 amortization =
![Page 53: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/53.jpg)
Carrying value x interest rate (discount rate) – interest actually paid
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
Year 1 amortization = (8,810 x 0.13)
![Page 54: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/54.jpg)
Carrying value x interest rate (discount rate) – interest actually paid
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
Year 1 amortization = (8,810 x 0.13) - 900
![Page 55: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/55.jpg)
Carrying value x interest rate (discount rate) – interest actually paid
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
Amortization amount each year =
Year 1 amortization = (8,810 x 0.13) – 900 = $245
![Page 56: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/56.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
![Page 57: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/57.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0
1
2
3
4
![Page 58: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/58.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0 --- --- --- --- 8,810
1 8,810 0.13 900 245
2
3
4
![Page 59: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/59.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0 --- --- --- --- 8,810
1 8,810 0.13 900 245 9,055
2 9,055
3
4
![Page 60: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/60.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0 --- --- --- --- 8,810
1 8,810 0.13 900 245 9,055
2 9,055 0.13 900 277
3
4
![Page 61: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/61.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0 --- --- --- --- 8,810
1 8,810 0.13 900 245 9,055
2 9,055 0.13 900 277 9,332
3 9,332 0.13 900 313 9,645
4 9,645
![Page 62: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/62.jpg)
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
Year (a)
Beg. Carrying
Value
(b)
Interest Rate
(c)
Interest Actually
Paid
(d)
Amortization
Amount
[(a) x (b)] – (c)
Ending Carrying
Value
(a) + (d)
0 --- --- --- --- 8,810
1 8,810 0.13 900 245 9,055
2 9,055 0.13 900 277 9,332
3 9,332 0.13 900 313 9,645
4 9,645 0.13 900 354 10,000
![Page 63: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/63.jpg)
Notes ReceivableAmortization 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)
![Page 64: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/64.jpg)
Notes ReceivableAmortization 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:
![Page 65: Notes Receivable](https://reader035.vdocuments.mx/reader035/viewer/2022062304/568141c2550346895dad9ac6/html5/thumbnails/65.jpg)
Notes ReceivableAmortization 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 $900Disc, Notes Rec $245
Interest Revenue, Notes Rec $1,145