Question

We are learning about notes receivables in my Intermediate Accounting class, and I am trying to understand the terms. My textbook states "When the interest stated on an interest-bearing note equals the effective (market) rate of interest, the note sells at face value.¹³ When the stated rate differs from the market rate, the cash exchanged (present value) differs from the face value of the note."

If someone could break this down in layman's terms I would really appreciate it. This is our first dip into this material, so no amount of over-simplification is too much.

Answer 1

Definition of Notes Receivable:-

Notes receivable is an asset of a company, financial institutions, or other organization that holds a written promissory note from third party. (The other party will record it as payable.)

How its reported:

The principal part of a note receivable that is expected to be collected within given period and balance is reported in the current asset section of the lender's balance sheet. The remaining principal of the note receivable is reported in the noncurrent asset section eligible Investments.

How transactions recorded for Notes Receivable in as clarified as below:

A company lends one of its important suppliers $20,000 and the supplier gives the company a written promissory note to repay the amount in six months along with interest at 10% per year. The company will debit its current asset account Notes Receivable for the principal amount of $20,000. The credit of $20,000 will be to Cash.

If a company borrows $200,000 from its bank and signs a promissory note to pay 8% interest quarterly and the principal amount in 8 months, the bank will debit its current asset account Notes Receivable and will credit Cash or Customers.