Post on 24-Dec-2015
Accounts Receivable
Generally, two major issues:
• How to Record Sales Discounts
Accounts Receivable
Generally, two major issues:
• How to Record Sales Discounts
• How to Record Doubtful Receipts
Accounts ReceivableDiscounts
The most prevalent is the cash discount for early payment on the account.
Accounts ReceivableDiscounts
The most prevalent is the cash discount for early payment on the account.
Example: 2/10, n/30
Accounts ReceivableDiscounts
The most prevalent is the cash discount for early payment on the account.
Example: 2/10, n/30
2% discount if paid within 10 days
Accounts ReceivableDiscounts
The most prevalent is the cash discount for early payment on the account.
Example: 2/10, n/30
Net amount due in 30 days.
Accounts ReceivableDiscounts
Two methods to record the discount:
• Gross Method: record primary sale at gross amount
Accounts ReceivableDiscounts
Two methods to record the discount:
• Gross Method: record primary sale at gross amount
Usually for firms whose clients generally don’t take advantage of the discounts
Accounts ReceivableDiscounts
Two methods to record the discount:
• Gross Method: record primary sale at gross amount
• Net Method: record primary sale at net-of-discount amount
Usually for firms whose clients generally take advantage of the discounts
Accounts ReceivableDiscounts
Two methods to record the discount:
• Gross Method: record primary sale at gross amount
• Net Method: record primary sale at net-of-discount amount
Accounts ReceivableDiscounts
Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.
Gross Method
Jan 1 Accts Rec 10,000Sales 10,000
Accounts ReceivableDiscounts
Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.
Accounts ReceivableDiscounts
Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.
Recorded as if discount won’t be taken
Gross Method
Jan 1 Accts Rec 10,000Sales 10,000
Accounts ReceivableDiscounts
Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.
Gross Method
Jan 1 Accts Rec 10,000Sales 10,000
Net Method
Jan 1 Accts Rec 9,800Sales 9,800
Accounts ReceivableDiscounts
Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.
Gross Method
Jan 1 Accts Rec 10,000Sales 10,000
Net Method
Jan 1 Accts Rec 9,800Sales 9,800
Recorded as if discount will be taken
Accounts ReceivableDiscounts
Example: Jan 9th, receive payment within discount period
Gross Method
Jan 9 Cash 9,800Sales Discs 200
Accts Rec 10,000
Accounts ReceivableDiscounts
Example: Jan 9th, receive payment within discount period
Accounts ReceivableDiscounts
Example: Jan 9th, receive payment within discount period
Gross Method
Jan 9 Cash 9,800Sales Discs 200
Accts Rec 10,000
If the discount is actually realized, it is recorded upon receipt of the cash payment. Sales Discounts is a contra-revenue account.
Accounts ReceivableDiscounts
Example: Jan 9th, receive payment within discount period
Gross Method
Jan 9 Cash 9,800Sales Discs 200
Accts Rec 10,000
Net Method
Jan 9 Cash 9,800Accts Rec 9,800
Accounts ReceivableDiscounts
Example: Jan 9th, receive payment within discount period
Gross Method
Jan 9 Cash 9,800Sales Discs 200
Accts Rec 10,000
Net Method
Jan 9 Cash 9,800Accts Rec 9,800
Discount has already been recorded on sales date.
Accounts ReceivableDiscounts
Example: Jan 29th, receive payment outside discount period
Now assume instead that the payment was sent after the discount period expired.
Accounts ReceivableDiscounts
Example: Jan 29th, receive payment outside discount period
Gross Method
Jan 29 Cash 10,000Accts Rec 10,000
Accounts ReceivableDiscounts
Example: Jan 29th, receive payment outside discount period
Gross Method
Jan 29 Cash 10,000Accts Rec 10,000
No correction needed, since we already assumed the discount would not be taken.
Accounts ReceivableDiscounts
Example: Jan 29th, receive payment outside discount period
Gross Method
Jan 29 Cash 10,000Accts Rec 10,000
Net Method
Jan 29 Cash 10,000Accts Rec 9,800Forfeited Discount 200
Accounts ReceivableDiscounts
Example: Jan 29th, receive payment outside discount period
Gross Method
Jan 29 Cash 10,000Accts Rec 10,000
Net Method
Jan 29 Cash 10,000Accts Rec 9,800Forfeited Discount 200
Record the forfeited discount (a revenue account).
Accounts ReceivableDoubtful Receipts
All receivables have some probability of default. The default on payment needs to be recorded appropriately.
Accounts ReceivableDoubtful Receipts
One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.
Accounts ReceivableDoubtful Receipts
One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.
Not considered an acceptable method because it does not match revenues with costs effectively.
Accounts ReceivableDoubtful Receipts
The accepted method is called the Allowance Method.
Accounts ReceivableDoubtful Receipts
The accepted method is called the Allowance Method.
An Allowance for Doubtful Accounts is set up as a contra-receivable account (contra-asset). It holds management’s best estimate for the amount of receivables that will default.
Accounts ReceivableDoubtful Receipts
To determine management’s best estimate for default, use one of two methods:
Accounts ReceivableDoubtful Receipts
To determine management’s best estimate for default, use one of two methods:
• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful
Accounts ReceivableDoubtful Receipts
To determine management’s best estimate for default, use one of two methods:
• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful
This is also called the income statement approach, since the estimate is based on a percentage of sales revenue.
Accounts ReceivableDoubtful Receipts
To determine management’s best estimate for default, use one of two methods:
• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful
• Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful
Accounts ReceivableDoubtful Receipts
To determine management’s best estimate for default, use one of two methods:
• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful
• Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful
This is also called the balance sheet approach, since the estimate is based on a percentage of a balance sheet receivable account.
Accounts ReceivableDoubtful Receipts
Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.
Accounts ReceivableDoubtful Receipts
Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.
2000 Credit Sales:
0.70 x $200,000 = $140,000
Accounts ReceivableDoubtful Receipts
Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.
2000 Credit Sales:
0.70 x $200,000 = $140,000
Estimate of doubtful collections:
0.04 x $140,000 = $5,600
Accounts ReceivableDoubtful Receipts
Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.
Journal entry (percentage of sales):
Bad Debt Expense $5,600Allowance for Doubtful Accts $5,600
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accts Receivable End. Bal $440,000
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accts Receivable End. Bal $440,000
$300,000 + $140,000 (70% of sales)
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400
$440,000 x 6%
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400
Required Entry to Adjust Allowance for doubtful accounts(percentage of receivables method):
Bad Debt Expense $8,400Allowance for Doubtful Accts $8,400
Accounts ReceivableDoubtful Receipts
Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.
Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000
Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400
Required Entry to Adjust Allowance for doubtful accounts(percentage of receivables method):
Bad Debt Expense $8,400Allowance for Doubtful Accts $8,400
Need to add $8,400 to beginning balance to meet required ending balance.
Accounts ReceivableSales Returns and Allowances
Returns and allowances are handled in the same manner as doubtful collection. An account called Allowance for Sales Returns is set up based on management’s best estimate for returns.
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• 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.
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%.
Notes Receivable
Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.
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.
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.
Valuing Notes Receivable
To properly value long-term notes, we need the following information:
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)
Valuing Notes Receivable
Using this information, do the following:
Valuing Notes Receivable
Using this information, do the following:
1. Set up repayment timeline.
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.
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).
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
1. Set up repayment timeline.
Year0
Year2
Year1
Year3
Year4
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
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
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
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
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
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%.
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
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
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
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
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
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
Valuing Notes Receivable
Example: 4 year note; no stated interest; $10,000 face value
The journal entry to record this note is:
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
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
1. Set up repayment timeline.
Year0
Year2
Year1
Year3
Year4
Valuing Notes Receivable
Example: 4 year note; 9% stated interest; $10,000 face value
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
Notes ReceivableAmortization of Discount
Notes ReceivableAmortization of Discount
Go back to our 13% interest rate example:
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:
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Notes ReceivableAmortization of Discount
At date of purchase, the balance sheet carries the note:
Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810
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 =
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 =
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 =
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)
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
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
Notes ReceivableAmortization of Discount
So, we can set up an annual amortization table:
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
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
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
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
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
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
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)
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:
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