Notes Receivable

Notes receivable

claims against the debtor or customer but is supported by a promissory note

Promissory note

an agreement entered into by a person who borrows money from another person who lends the money

Characteristics of Notes receivable

• Evidenced by a promissory note

• It has an interest rate

• Maturity value

• Maturity date

Types of Notes As to interest

• Interest-bearing note

• Noninterest-bearing note

Interest-bearing note

• a note that states the rate of interest also known as stated rate or nominal rate. The face value of this note does not include the interest

Noninterest-bearing note

a note that includes the interest in the face value

Types of Notes As to due date

• Lump-sum

• Installment

Types of Interest Rate

• Stated or nominal interest rate

• Effective or market or yield rate

Stated or nominal interest rate

it is the contractual annual rate of interest charged by a lender or promised by a borrower

Stated or nominal interest rate

It is also the interest rate indicated in the face of a promissory note

Stated or nominal interest rate

This is usually the basis for the amount of interest being received/receivable

Effective or market or yield rate

It is the annual rate of interest actually paid or earned

Notes with realistic interest rates

are those stated rates that approximates the prevailing market rate for similar obligations. Nominal = Effective

Notes with realistic interest rates

Also, the fair value/present value of the note at the date of issuance is equal to its face value. Basically, these are the interest-bearing notes

Notes with unrealistic interest rate

interest rate appearing on the face of the note is significantly different from the market rate or similar notes

Notes with unrealistic interest rate

the consideration received on account of the note issued has a fair value that is significantly different from the face value of the note

Premium on Notes Receivable

Unrealistic Interest Rate

If stated rate > effective rate

—> Discounted amount / Present value > Face value of the note = __________

Discount on Notes Receivable

Unrealistic Interest Rate

If stated rate < effective rate

—> Discounted amount / Present value < Face value of the note = __________