Notes Receivable
CHAPTER 7: NOTES 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 fixed determinable future time a sum certain in money to order or to bearer. * Maker is the one who writes the promissory note promising to pay another person, known as the payee, a definite sum of money. * Notes receivable represents only the claims arising from sale of merchandise or service in the ordinary course of business. * Notes received from officers, employees, shareholders and affiliates shall be designated separately. * Dishonored notes are promissory note that is already mature but is not yet paid. Notes of this kind shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges. It shall be recorded as follows:
Accounts receivable xx Notes receivable xx Interest Income xx * Notes receivable shall be measured initially at present value.
Present value is the sum of all future cash flows discounted using the prevailing market rate of interest for similar notes. * Short-term notes receivable are measured at face value. * Interest bearing long-term notes are measured at face value which is actually the present value upon issuance. * 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. * Subsequent to initial recognition, long-term notes receivable shall be measured at amortized cost using the effective interest method.
Amortized cost is the amount at which the note receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial carrying
* 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 fixed determinable future time a sum certain in money to order or to bearer. * Maker is the one who writes the promissory note promising to pay another person, known as the payee, a definite sum of money. * Notes receivable represents only the claims arising from sale of merchandise or service in the ordinary course of business. * Notes received from officers, employees, shareholders and affiliates shall be designated separately. * Dishonored notes are promissory note that is already mature but is not yet paid. Notes of this kind shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges. It shall be recorded as follows:
Accounts receivable xx Notes receivable xx Interest Income xx * Notes receivable shall be measured initially at present value.
Present value is the sum of all future cash flows discounted using the prevailing market rate of interest for similar notes. * Short-term notes receivable are measured at face value. * Interest bearing long-term notes are measured at face value which is actually the present value upon issuance. * 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. * Subsequent to initial recognition, long-term notes receivable shall be measured at amortized cost using the effective interest method.
Amortized cost is the amount at which the note receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial carrying