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Understanding Notes Receivable

Notes receivable are formal claims supported by promissory notes, which are written promises to pay a specific amount. If a note matures and is not paid, it is considered dishonored and should be transferred to accounts receivable. Initial measurement of notes receivable varies based on whether they are short-term, interest-bearing, or non-interest bearing, with subsequent measurement done at amortized cost using the effective interest method.

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11 views17 pages

Understanding Notes Receivable

Notes receivable are formal claims supported by promissory notes, which are written promises to pay a specific amount. If a note matures and is not paid, it is considered dishonored and should be transferred to accounts receivable. Initial measurement of notes receivable varies based on whether they are short-term, interest-bearing, or non-interest bearing, with subsequent measurement done at amortized cost using the effective interest method.

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jennygrc015
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Notes Receivable

INTERMEDIATE ACCOUNTING 1
What is a note receivable?
Notes receivable are claims supported by formal promises
to pay usually in the form of notes.
A negotiable promissory note is an unconditional promise
in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed
determinable future time a sum certain in money to order
or to bearer.
Simply stated, a promissory note is a written contract in
which one person, known as the maker, promises to pay
another person, known as the payee, a definite sum of
money.
Dishonored Notes
When a promissory note matures and is not paid, it
is said to be dishonored.
Theoretically, dishonored noted receivable should
be removed from the notes receivable account and
transferred to accounts receivable.
The amount debited to accounts receivable should
include the face amount, interest and other
charges.
Initial Measurement of notes
receivable
Conceptually, notes receivable shall be measured
initially at present value.
The present value is the sum of all future cash flows
discounted using the prevailing market rate/effective
interest rate of interest for similar notes.
The purpose of present value is to determine the
current worth of a future sum of money.
However, short-term notes receivable shall be
measured initially at face value.
Interest Bearing Notes
Receivable
The initial measurement of long-term notes will
depend on whether the notes are interest-bearing
or non-interest bearing.
Interest bearing long-term notes are measured at
face value which is actually the present value upon
issuance.
Non-Interest Bearing Notes
Receivable
Non-Interest bearing long-term notes are
measured at present value which is the discounted
value of the future cash flows using the effective
interest rate.
Actually, the term “non-interest bearing” is a
inaccurate because all notes implicitly contain
interest.
Subsequent Measurement
Subsequent to initial recognition, long-term notes
receivable shall be measured at amortized cost
using the effective interest method.
Concept Summary
ILLUSTRATIONS
Thankyou Future CPAs!

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