Int. Acc Exam 3: Pt 2

Notes Receivable

What is Accounts Receivable (A/R)?

Money owed by customers, reported net of bad debts.

What does “Net A/R” mean?

A/R after subtracting Allowance for Doubtful Accounts (AFDA).

Does what you're owed always equal what you collect?

No—must estimate uncollectible accounts.

% of Sales method affects what?

Bad Debt Expense only (not AFDA directly).

% of A/R method affects what?

Ending balance of AFDA.

A/R Turnover formula?

Net Sales ÷ Avg. Net A/R.

What does A/R Turnover measure?

How efficiently a company collects receivables.

What does a declining A/R turnover indicate?

Slower collections → more strain on resources.

Days Sales in Receivable formula?

365 ÷ A/R Turnover.

What does Days Sales in Receivable show?

Average number of days to collect payment.

Key difference between A/R and Notes Receivable?

Notes have longer timelines and include interest.

Why would a customer sign a note?

They can’t pay within normal terms and agree to pay interest.

What is a short-term note?

An interest-bearing note with a stated interest rate.

How is interest paid on short-term notes?

Separately from principal.

Interest formula?

Face Value × Rate × (Months ÷ 12).

Cash flows for short-term notes?

Principal (investing) + Interest (operating).

What happens if stated rate = market rate?

Present Value = Face Value.

Entry when receiving a note?

Debit Notes Receivable, Credit Cash/Revenue.

Year-end adjusting entry?

Debit Interest Receivable, Credit Interest Revenue.

Entry at maturity?

Debit Cash, Credit Notes Receivable + Interest Receivable + Interest Revenue.

What is a non-interest-bearing note?

No stated interest; interest is embedded in Face Value.

What is imputed interest rate?

Market rate for similar loans.

Why is PV < FV?

Because interest is built into the future amount.

What is “discount on notes receivable”?

Difference between Face Value and Present Value.

What type of account is Discount on N/R?

Contra-asset (credit balance).

Carrying Value formula?

Notes Receivable − Discount.

Interest revenue formula (long-term)?

Carrying Value × Market Rate.

Does interest revenue change over time?

Yes—because Carrying Value changes.

What is discount amortization?

Portion of discount recognized as interest revenue.

Entry when receiving LT- note?

Debit Notes Receivable, Credit Discount + Cash/Asset.

Adjusting entry for interest?

Debit Discount, Credit Interest Revenue.

Entry at maturity?

Debit Cash, remove Notes Receivable and Discount.

What is shown on the Balance Sheet?

Present Value (Carrying Value).

What happens to discount over time?

It decreases as interest revenue is recognized.

For non-interest-bearing notes, is there cash interest?

No—interest is recognized but not received separately.

What direction does Carrying Value move?

It increases toward Face Value over time.