A Note Receivable Is A Negotiable Instrument Which - T-Tees - Your Answers Await, Life's Questions Unraveled

Short-Term Notes Receivable

When notes receivable have terms of less than one year, accounting for short-term notes is relatively straight forward as discussed below.

You may be interested

Calculating the Maturity Date

You are viewing: A Note Receivable Is A Negotiable Instrument Which

Knowing the correct maturity date will have an impact on when to record the entry for the note and how to calculate the correct interest amount throughout the note’s life. For example, to calculate the maturity date of a ninety-day note dated March 14, 2020:

For example, assume that on March 14, 2020, Ripple Stream Co. accepted a ninety-day, 8% note of $5,000 in exchange for extending the payment period of an outstanding account receivable of the same value. Ripple’s entry to record the acceptance of the note that will replace the accounts receivable is:

The entry for payment of the note ninety days at maturity on June 12 would be:

In the example above, if financial statements are prepared during the time that the note receivable is outstanding, interest will be accrued to the reporting date of the balance sheet. For example, if Ripple’s year-end were April 30, the entry to accrue interest from March 14 to April 30 would be:

Refer to more articles: Which Country Code Is 447

When the cash payment occurs at maturity on June 12, the entry would be:

The interest calculation will differ slightly had the note been stated in months instead of days. For example, assume that on January 1, Ripple Stream accepted a three-month (instead of a ninety-day), 8%, note in exchange for the outstanding accounts receivable. If Ripple’s year-end was March 31, the interest accrual would be:

Note the difference in the interest calculation between the ninety-day and the three-month notes recorded above. The interest amounts differ slightly between the two calculations because the ninety-day note uses a 90/365 ratio (or 24.6575% for a total amount of $98.63) while the three-month note uses a 3/12 ratio (or 25% for a total of $100.00).

Receivables, Interest, and the Time Value of Money

All financial assets are to be measured initially at their fair value which is calculated as the present value amount of future cash receipts. But what is present value? It is a discounted cash flow concept, which is explained next.

It is common knowledge that money deposited in a savings account will earn interest, or money borrowed from a bank will accrue interest payable to the bank. The present value of a note receivable is therefore the amount that you would need to deposit today, at a given rate of interest, which will result in a specified future amount at maturity. The cash flow is discounted to a lesser sum that eliminates the interest component—hence the term discounted cash flow. The future amount can be a single payment at the date of maturity or a series of payments over future time periods or some combination of both. Put into context for receivables, if a company must wait until a future date to receive the payment for its receivable, the receivable’s face value at maturity will not be an exact measure of its fair value on the date the note is legally executed because of the embedded interest component.

Refer to more articles: Which Food Do Not Need Temperature Control

For example, assume that a company makes a sale on account for $5,000 and receives a $5,000, six-month note receivable in exchange. The face value of the note is therefore $5,000. If the market rate of interest is 9%, or its value without the interest component, is $4,780.79 and not $5,000. The $4,780.79 is the amount that if deposited today at an interest rate of 9% would equal $5,000 at the end of six months. Using an equation, the note can be expressed as:

(0 PMT, .75% I/Y, 6 N, 5000 FV)

Where I/Y is interest of .75% each month (9%/12 months) for six months.

N is for interest compounded each month for six months.

FV is the payment at the end of six months’ time (future value) of $5,000.

To summarize, the discounted amount of $4,780.79 is the fair value of the $5,000 note at the time of the sale, and the additional amount received after the sale of $219.21 () is interest income earned over the term of the note (six months). However, for any receivables due in less than one year, this interest income component is usually insignificant. For this reason, both IFRS and ASPE allow net realizable value (the net amount expected to be received in cash) to approximate the fair value for short-term notes receivables that mature within one year. So, in the example above, the $5,000 face value of the six-month note will be equivalent to the fair value and will be the amount reported, net of any estimated uncollectability (i.e. net realizable value), on the balance sheet until payment is received. However, for notes with maturity dates greater than one year, fair values are to be determined at their discounted cash flow or present value, which will be discussed next.

Refer to more articles: Which D9 Sorority Should I Join

Source: https://t-tees.com
Category: WHICH