Chapter 5

Notes Receivable

Written promise from borrower to lender for a specific amount at a future date.

Promissory Note

Financial instrument with a written promise to pay a definite sum, including principal, interest rate, maturity date, and payment schedule.

Interest

Bearing Notes

Noninterest

Bearing Notes

Trade Notes Receivable

Related to sale of goods/services; formal acknowledgment of debt from customers.

Non

Trade Notes Receivable

Face Amount

The amount to be repaid at maturity.

Present Value (PV)

Current worth of a future sum considering time value of money.

Transaction Price

Cash or cash equivalent received for goods/services.

Reasonable Interest Rate

Competitive market interest.

Unreasonable Interest Rate

Significantly lower or higher than market; may not be at arm's length.

No Interest Rate

Maturity over one year with implied interest.

Imputed Rate

Interest considered for accounting on noninterest

Unearned Interest

Collectible but not yet earned; recognized as liability.

Interest Revenue

Income from interest on notes receivable.

Effective Interest Method

Calculates interest expense/revenue accurately over time.

Net Carrying Amount

Reported amount on the balance sheet; face amount minus unamortized discount/premium.

Cash Price Equivalent

Present value of cash flows from a note.

Installments

Equal payment series for debt repayment.

Annuity Due

Payments at the beginning of periods.

Ordinary Annuity

Payments at the end of periods.

Net Realizable Value

Expected cash collection after estimated uncollectible amounts.

Trial and Error Approach

Estimation method for effective interest rate based on adjusted guesses.