Understanding Cash and Receivables in Financial Accounting

CHAPTER 6 Cash and Receivables Continuing TVM concepts from Chapter 5... NOTES RECEIVABLE All notes contain an interest element because of the time value of money. However, firms can classify them as either an Interest Bearing or Non-Interest Bearing Note. Companies record and report long-term Note Receivables at the present valueof what they expect to collect. When the interest stated on a note equals the market rate, the note sells at Face Value. When the stated rate differs from the market rate, the cash exchanged (present value) differs from the Face Value of the note. This difference, either a discount or premium, is amortized over the life of the note. Regardless, we record the note at Face Value. AR is short term, no interest bearing AP is more long term, has interest associated Net AR= AR- ADA Interest Bearing Notes A ___stated__rate of interest is explicitly given on the note The _effective__(market) rate of interest represents the customer's normal cost to borrow If only the statedrate of interest is given, then the stated and effective rate are presumed to be equal If the stated % = effective %... The note is issued at Face Value Face Value = Face Value represents If the stated % ≠ effective %... The note is issued at a discount or premium Record the note at ___________________ in the journal Example: On January 1st, Desert Company performed services for a customer. In return, they accepted a $50,000, 8%, 3-year note. Interest will be paid annually each December 31st. Principal will be repaid at maturity. Solve for present value and record the service revenue on January 1st . 1 Spring 2023 - © Erin Jordan, Ph.D., Arizona State UniversityACC 340 - Chapter 6 - PagePV$1(8%, 3) = 0.79383