Question

1. Discuss the nature and use of notes receivable and how to calculate related interest.

2. Explain what a notes receivable register is and how to prepare one.

3. Explain how to calculate and record accrued interest receivable at year end.

4. Explain how to calculate and record the discounting of notes receivable.

5. Discuss how notes receivable should be reported in the financial statements.

Answer 1

1:- A note receivable is a written promise to receive a specific amount of cash from another party on one or more future dates. This is treated as an asset by the holder of the note.Notes receivable are also known as promissory notes receivable.

-->> The calculation of the interest earned on a note receivable is:

Principal x Interest rate x Time period = Interest earned

2:-Note receivable in the balance sheet as a current asset if it is due within 12 months or as non-current (i.e., long-term) if it is due in more than 12 months. If a note has a duration of longer than one year,

3:- The accrued interest receivable refers to interest income a company has earned but has not received in cash. This happens when the cash interest payment falls outside an accounting period. Accrued interest receivable is an asset account on the investor's books and a current liability on the issuer's books.

Calculation

The interest receivable amount is a function of the interest rate, the principal (or par value) and the period over which the interest has accrued. For example, if a company owns a $1,000 corporate bond that pays interest semiannually at an annual 6 percent rate, the annual interest payment is $60 ($1,000 x 0.06), and the interest accrues at $5 per month ($60 / 12). For the first-quarter financial statements at the end of March, the company has accrued three months of interest, or $15 ($5 x 3).

The company must prepare adjusting entries for the accrued interest receivable when it prepares its quarterly financial statements. These entries are to debit accrued interest receivable and credit interest revenue, thus increasing both accounts.

In the event a business is in need of cash, it has the option to transfer its notes receivable to a bank, which is known as discounting.

The interest a bank charges on the period it holds a note is known as discount.When proceeds are received for the discounted notes, the Cash account is debited, and the Notes Receivable account credited. If the proceeds exceed the face value of the note, the Interest Income account is credited. If the proceeds are less than the face value of the note, Interest Expense is debited.