Notes Receivable
The formula for calculating interest multiplies which of the following?
Annual interest rate Fraction of the annual period Face amount of the note
Jessica accepts a $50,000, 60-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is
$49,000. Reason: $50,000 - ($50,000 x 12% x 60/360) = $49,000
Lee accepts a $100,000, 90-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is
$97,000. Reason: $100,000 x 12% x 3/12 = discount amount
Garcia sells goods to a customer for $100,000 on a noninterest-bearing, 180-day note receivable. The discount rate is 12%. The effective interest rate for this note is (use 360 days for the year)
12.77%. Reason: The interest is $100,000 x 12% x 180/360 days = $6,000. $6,000/$94,000 proceeds = 6.383% x 2 = 12.77% annual interest (rounded).
(Face amount x annual rate x fraction of the annual period) is the formula for
interest on a note.
An alternative method for valuing notes receivable is the
fair value method.
Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?
IFRS restricts the circumstances for applying the fair value option
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
The discount on notes receivable account is classified as
a contra account to notes receivable.
On January 1, 2021, Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?
as a noncurrent asset
On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a
debit to Notes Receivable, $40,000.
On March 1, Song Corp. receives a $100,000, 90-day, noninterest-bearing note receivable from a customer. The note has a 12% discount rate. On March 1, when Song receives the note from the customer, Song will record a
debit to notes receivable for $100,000.
If a company elects the fair value option for receivables, changes in fair value are recognized as
gains and losses on the income statement.
It is likely that bad debt accruals under IFRS will be _____ and will occur _____ than under U.S. GAAP.
lower; later
To calculate the effective rate of interest on a noninterest-bearing note, the amount of interest is divided by the ______.
sales price
When recording noninterest-bearing notes receivable, the discount on a noninterest-bearing note receivable represents
the interest to be earned on the note receivable.
If a company anticipates that some of its note receivables will not be collectible, it should
use an allowance account to value the note at net realizable value.
On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?
Debit Interest Receivable $2,000; credit interest revenue $2,000. Reason: $100,000 x 8% x (3/12)
On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?
Debit Notes Receivable $100,000; credit Service Revenue $100,000.
True or false: An interest-bearing note earns interest, whereas a noninterest-bearing note does not earn interest.
False Reason: With a noninterest-bearing note, the interest is deducted from the principal of the note.
The IFRS Expected Credit Loss model bases expected credit losses on most receivables that could occur when?
Only within the next twelve months.
Allowance account
Similar to accounts receivable, a company must estimate credit losses on its notes receivable and use an allowance account to reduce the receivable to the appropriate carrying value
True or false: Both interest bearing and noninterest bearing notes bear interest.
True
True or false: When a discount on notes receivable is amortized, interest revenue is recorded.
True Reason: A discount on notes receivable represents future interest revenue, which is recorded when the discount is amortized.
On March 1, Song Corp. receives a $100,000, 90-day, noninterest-bearing note receivable from a customer. The discount rate is 12%. On June 1, when Song receives full payment from the customer, Song will record a
credit to interest revenue for $3,000. Reason: $100,000 x 12% x 90/360
On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a December 31 year-end. On February 1, year 2, when the note matures, the journal entry for Orange will include a
credit to interest revenue, $400.
On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end and principal and interest are due at maturity. The entry required on Light's books on April 1 when the note is due requires a
credit to note receivable, $100,000 credit to interest receivable, $2,000. debit to cash, $104,000 credit to interest revenue, $2,000
On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on December 31, at the end of the year includes a
debit Interest Receivable, $800. Reason: The 12% is an annual rate and since only 2/12 of a year has been earned, interest revenue is $800 (=$40,000*0.12*(2/12))