ch07 part 2 - Chapter 7: Cash and Receivables Part 2 AIM...

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  Chapter 7.2 1 Chapter 7: Cash and Receivables Part 2 AIM 3331-0U1 Summer 2009 Xinyi Lu
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  Chapter 7.2 2 Aging Schedule of Account  Receivable Company may set up an aging schedule of  account receivable. Usually, it is used as a control device to  determine the composition of A/R and to  identify delinquent accounts. Sometimes, it is used to determine bad debt  expense: based on past experience,  company applies different percentages to  various age categories.  See example on textbook page 324.
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  Chapter 7.2 3 Recognition of Notes Receivable Notes Receivable (N/R) Supported by a formal promissory note. Interest-bearing (has a stated rate of  interest) OR Noninterest-bearing (interest included in  face amount)
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  Chapter 7.2 4 Recognition of Notes Receivable Generally originate from: Customers who need to extend the payment  period of an outstanding receivable  High-risk or new customers Loans to employees and subsidiaries Sales of property, plant, and equipment Lending transactions (the majority of notes)
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  Chapter 7.2 5 Short-term Notes Receivable Short-term N/R is recorded at  face  value  (less allowances). Generally, N/R treated as cash  equivalent are  not subject to premium  or discount amortization , because the  interest implicit in the maturity value is  immaterial.
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  Chapter 7.2 6 Long-term Notes Receivable Long-term N/R is recorded at the  present  value  of the cash they expected to collect.  Note may be issued at face value or issued at  a discount/premium. If issued at a discount/premium, the  discount/premium will be amortized  over  the life of the note to approximate the  effective (market) interest rate.
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  Chapter 7.2 7 Terminology in Accounting for Notes   Face amount : The principal amount due that is stated on  the face of the note. The debit balance of the Notes Receivable  account is always equal to the face  amount.
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  Chapter 7.2 8 Terminology in Accounting for Notes Stated interest rate (face rate,  coupon rate) : The rate that is stated on the face of the  note.  This rate is used to determine the amount  of periodic interest payments.  A note may be noninterest-bearing (i.e.  have a stated rate of zero).
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  Chapter 7.2 9 Terminology in Accounting for Notes   Effective (market) interest rate : This is the rate used in the market to  determine the value of the note.  It is the discount rate used to determine  present value.
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  Chapter 7.2 10 Terminology in Accounting for Notes Present value : At the date of issuance, a note is valued at  the present value of the future principal 
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ch07 part 2 - Chapter 7: Cash and Receivables Part 2 AIM...

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