Chapter 5 - Notes Receivables

note receivable

a claim supported by a formal promise to pay a certain sum of money at a specific future date usually in the form of a promissory note

interest bearing notes

have a stated interest rate

noninterest-bearing notes

do not have a stated interest because they include the interest element as part of the face amount

other terms for imputed rate of interest

effective interest rate, market rate, yield rate

effective interest rate

rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument

cash price equivalent

is the amount that would have been paid if the transaction was settled outright on cash basis

simple interest

interest is earned only on the principal

compounded interest

interest is earned on both principal and interest

FV of 1

( 1 + i )^n

PV of 1

( 1 + i )^-n

ordinary annuity

deposits are made at the end of the year

annuity due

deposits are made at the beginning

FV of ordinary annuity

( 1 + i )^n - 1 / i

FV of annuity due

( 1 + i )^n+1 - 1 / i -1

PV of ordinary annuity

1-(1+i)^-n / i

PV of annuity due

1-(1+i)^-n-1 / i + 1

short-term receivable initial measurement

fv plus transaction costs

fv is equal to = a. face amount b. present value c. transaction price

short-term receivable subsequent measurement

if face amount = recoverable historical cost, if present value = amortized cost,

long-term receivable bearing interest initial measurement and subsequent measurement:

fv plus transaction costs

fair value equal to face amount

subsequent= recoverable historical host

long-term receivable non bearing interest initial and subsequent measurement:

fv plus transaction costs

fair value equal to present value

subsequent = amortized cost

long-term receivable bearing unreasonable interest initial measurement and subsequent measurement:

fv plus transaction costs

fair value equal to present value

subsequent = amortized cost

amortized cost

the amount at which the financial asset or financial liability is measured at initial recognition minus principal prepayments, plus or minus the cumulative amortization

effective interest method

method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period

effective interest method

the amortized cost of a receivable is determined using the

unearned interest income

the difference between the face amount and the present value of the note represents

deferred annuity

is an annuity in which periodic cash flows begin only after two or more periods have passed

interest receivable =

nominal rate x face amount

interest income =

effective interest rate x present value