510chapter7fall2009afterclass1132009

510chapter7fall2009afterclass1132009 - Chapter 7: Cash and...

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Unformatted text preview: Chapter 7: Cash and Chapter 7: Cash and Receivables Receivables Supported by a formal promissory note. Recognition of Notes Receivable Notes Receivable A negotiable instrument Maker signs in favor of a Payee Interest-bearing (has a stated rate of interest) OR Zero interest-bearing (interest included in face amount) 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) Recognition of Notes Receivable Short-Term Long-Term Record at Face Value , less allowance Record at Present Value of cash expected to be collected Interest Rates Stated rate = Market rate Stated rate > Market rate Stated rate < Market rate Note Issued at Face Value Premium Discount Issues NOT at face value Non-interest bearing Interest bearing 1. Determine issue price on notes receivable at implicit rate of interest 2. The discount/premium is amortized to interest revenue by the effective interest method 1. Determine issue price on notes receivable at the effective rate of interest. 2. The discount/premium is amortized to interest revenue by the effective interest method Recognition of Notes Receivable Recognition of Notes Receivable Exercise Balance Bar Co. lends Bio Foods $100,000 in exchange for a $100,000, 5-year note bearing interest at 8 percent annually. The market rate of interest for a note of similar risk is also 8 percent. How does Balance Bar record the receipt of the note? Note Issued at Face Value 1 2 3 4 5 6 8,000 8,000 8,000 $8,000 8,000 $100,000 Number of Discount Rate Periods 4% 6% 8% 10% 12% 1 0.96154 0.94340 0.92593 0.90900 0.89286 5 4.45183 4.21236 3.99271 3.79079 3.60478 10 8.11090 7.36009 6.71008 6.14457 5.65022 15 11.11839 9.71225 8.55948 7.60608 6.81086 20 13.59033 11.46992 9.81815 8.51356 7.46944 Table 6-4 Table 6-4 $8,000 x 3.99271 = $31,942 Interest Factor Present Value PV of Interest Note Issued at Face Value Number of Discount Rate Periods 4% 6% 8% 10% 12% 1 0.96154 0.94340 0.92593 0.90909 0.89286 5 0.82193 0.74726 0.68058 0.62092 0.56743 10 0.67556 0.55839 0.46319 0.38554 0.32197 15 0.55526 0.41727 0.31524 0.23939 0.18270 20 0.45639 0.31180 0.21455 0.14864 0.10367 Table 6-2 Table 6-2 $100,000 x .68058 = $68,058 Principal Factor Present Value PV of Principal Note Issued at Face Value Summary Present value of Interest $ 31,942 Present value of Principal 68,058 current market value $100,000 Dat e Account Tit le...
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This note was uploaded on 12/29/2009 for the course ACC 5100 taught by Professor Andrews during the Fall '09 term at Wayne State University.

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510chapter7fall2009afterclass1132009 - Chapter 7: Cash and...

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