Formulas for this Chapter

Best to study this first since other stuff builds off it

Net realizable value

Accounts receivable - allowance for doubtful accounts

This is how much the company expects to collect in cash or "realize."

Discount on note receivable (zero interest bearing note)

Face value of the note - present value of the note (Calculate using Table 2 "Present Value of $1").

Initial carrying value of a zero interest bearing note

Present value of the note (Calculate by taking face value of the note and multiplying by the factor found using Table 2 "Present Value of $1).

What is the carrying value of a regular note (has interest)

• If no discount this is just the face value of the note.

• If there is a discount this is the Present value of the note (Calculate by taking face value of the note and multiplying by the factor found using Table 2 "Present Value of $1).

  • Can also be calculated by doing face value - discount if we know the discount amount.

Amount of cash received each year (effective interest method)

Face value of note x interest on the note (not market rate).

If it is a zero interest bearing note then the cash received each year is $0.

Interest revenue for end of year on a note receivable (effective interest method)

Carrying value of note x market rate interest (or implicit interest if it is a zero interest bearing note).

Amount of discount amortized at end of year for a note receivable (effective interest method)

Interest revenue calculated - cash received each year we calculated.

New carrying value (effective interest method)

Carrying value of note at beginning of this year + amount of discount amortized this year