Chapter 23: Notes Receivable Flashcards
(15 cards)
What is the main difference between notes receivable and accounts receivable?
Notes receivable are formal promises to pay with a written agreement, while accounts receivable are informal promises to pay from customers.
What type of agreement typically supports many notes receivable?
Many notes receivable are supported by a written contract known as a promissory note.
What information does a promissory note specify?
The amount owing and the date(s) for repayment of interest and/or principal.
How are notes receivable initially measured?
Initially measured at fair value, which is the cash price on the date of the transaction.
What is the initial recording value of a note receivable when the stated rate differs from the market rate?
The note is recorded at its present value calculated using a market rate of interest.
What does fair value of a note receivable represent?
Fair value can be determined by calculating the present value of future cash flows using the market interest rate.
How are notes receivable subsequently measured?
Subsequently recorded at amortized cost.
What components make up the amortized cost of a note receivable?
- Initial fair value
- Plus accrued interest (based on market rate)
- Less payments made (and any reductions for impairment)
When is interest revenue recorded for notes receivable?
Interest revenue is recorded over time, regardless if it is being paid or accruing to be paid later.
What is the formula for calculating interest on short-term notes receivable?
Principal amount × annual interest rate × proration for partial year = interest.
What are the two components of interest that must be considered when the stated interest rate differs from the market rate?
- Amortized cost adjustment (bringing the note to present value)
- Actual interest payment based on the stated interest rate
What methods can be used under ASPE to record the note at amortized cost?
- Straight-line method
- Effective interest rate method
How is interest revenue recorded using the straight-line method?
Interest revenue is recorded evenly over the term of the note.
How does the effective interest rate method calculate interest revenue?
Uses the market rate of interest determined when the note was issued, applied to the opening carrying value of the note.
True or False: The amount of interest recorded using the effective interest rate method is the same each year.
False.
