Accounts Receivable Generally, two major issues: How to Record Sales Discounts.

Accounts Receivable

Generally, two major issues:

• How to Record Sales Discounts

Accounts Receivable

Generally, two major issues:

• How to Record Sales Discounts

• How to Record Doubtful Receipts

Accounts ReceivableDiscounts

The most prevalent is the cash discount for early payment on the account.

Accounts ReceivableDiscounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30

Accounts ReceivableDiscounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30

2% discount if paid within 10 days

Accounts ReceivableDiscounts

The most prevalent is the cash discount for early payment on the account.

Example: 2/10, n/30

Net amount due in 30 days.

Accounts ReceivableDiscounts

Two methods to record the discount:

• Gross Method: record primary sale at gross amount

Accounts ReceivableDiscounts

Two methods to record the discount:

• Gross Method: record primary sale at gross amount

Usually for firms whose clients generally don’t take advantage of the discounts

Accounts ReceivableDiscounts

Two methods to record the discount:

• Gross Method: record primary sale at gross amount

• Net Method: record primary sale at net-of-discount amount

Usually for firms whose clients generally take advantage of the discounts

Accounts ReceivableDiscounts

Two methods to record the discount:

• Gross Method: record primary sale at gross amount

• Net Method: record primary sale at net-of-discount amount

Accounts ReceivableDiscounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1 Accts Rec 10,000Sales 10,000

Accounts ReceivableDiscounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Accounts ReceivableDiscounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Recorded as if discount won’t be taken

Gross Method

Jan 1 Accts Rec 10,000Sales 10,000

Accounts ReceivableDiscounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1 Accts Rec 10,000Sales 10,000

Net Method

Jan 1 Accts Rec 9,800Sales 9,800

Accounts ReceivableDiscounts

Example: Jan 1st, sell $10,000 of product under 2/10, n/30 terms.

Gross Method

Jan 1 Accts Rec 10,000Sales 10,000

Net Method

Jan 1 Accts Rec 9,800Sales 9,800

Recorded as if discount will be taken

Accounts ReceivableDiscounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9 Cash 9,800Sales Discs 200

Accts Rec 10,000

Accounts ReceivableDiscounts

Example: Jan 9th, receive payment within discount period

Accounts ReceivableDiscounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9 Cash 9,800Sales Discs 200

Accts Rec 10,000

If the discount is actually realized, it is recorded upon receipt of the cash payment. Sales Discounts is a contra-revenue account.

Accounts ReceivableDiscounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9 Cash 9,800Sales Discs 200

Accts Rec 10,000

Net Method

Jan 9 Cash 9,800Accts Rec 9,800

Accounts ReceivableDiscounts

Example: Jan 9th, receive payment within discount period

Gross Method

Jan 9 Cash 9,800Sales Discs 200

Accts Rec 10,000

Net Method

Jan 9 Cash 9,800Accts Rec 9,800

Discount has already been recorded on sales date.

Accounts ReceivableDiscounts

Example: Jan 29th, receive payment outside discount period

Now assume instead that the payment was sent after the discount period expired.

Accounts ReceivableDiscounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29 Cash 10,000Accts Rec 10,000

Accounts ReceivableDiscounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29 Cash 10,000Accts Rec 10,000

No correction needed, since we already assumed the discount would not be taken.

Accounts ReceivableDiscounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29 Cash 10,000Accts Rec 10,000

Net Method

Jan 29 Cash 10,000Accts Rec 9,800Forfeited Discount 200

Accounts ReceivableDiscounts

Example: Jan 29th, receive payment outside discount period

Gross Method

Jan 29 Cash 10,000Accts Rec 10,000

Net Method

Jan 29 Cash 10,000Accts Rec 9,800Forfeited Discount 200

Record the forfeited discount (a revenue account).

Accounts ReceivableDoubtful Receipts

All receivables have some probability of default. The default on payment needs to be recorded appropriately.

Accounts ReceivableDoubtful Receipts

One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.

Accounts ReceivableDoubtful Receipts

One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.

Not considered an acceptable method because it does not match revenues with costs effectively.

Accounts ReceivableDoubtful Receipts

The accepted method is called the Allowance Method.

Accounts ReceivableDoubtful Receipts

The accepted method is called the Allowance Method.

An Allowance for Doubtful Accounts is set up as a contra-receivable account (contra-asset). It holds management’s best estimate for the amount of receivables that will default.

Accounts ReceivableDoubtful Receipts

To determine management’s best estimate for default, use one of two methods:

Accounts ReceivableDoubtful Receipts

To determine management’s best estimate for default, use one of two methods:

• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful

Accounts ReceivableDoubtful Receipts

To determine management’s best estimate for default, use one of two methods:

• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful

This is also called the income statement approach, since the estimate is based on a percentage of sales revenue.

Accounts ReceivableDoubtful Receipts

To determine management’s best estimate for default, use one of two methods:

• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful

• Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful

Accounts ReceivableDoubtful Receipts

To determine management’s best estimate for default, use one of two methods:

• Percentage of Sales Method: a fixed percentage of sales will be considered doubtful

• Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful

This is also called the balance sheet approach, since the estimate is based on a percentage of a balance sheet receivable account.

Accounts ReceivableDoubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

Accounts ReceivableDoubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

2000 Credit Sales:

0.70 x $200,000 = $140,000

Accounts ReceivableDoubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

2000 Credit Sales:

0.70 x $200,000 = $140,000

Estimate of doubtful collections:

0.04 x $140,000 = $5,600

Accounts ReceivableDoubtful Receipts

Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

Journal entry (percentage of sales):

Bad Debt Expense $5,600Allowance for Doubtful Accts $5,600

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accts Receivable End. Bal $440,000

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accts Receivable End. Bal $440,000

$300,000 + $140,000 (70% of sales)

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400

$440,000 x 6%

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400

Required Entry to Adjust Allowance for doubtful accounts(percentage of receivables method):

Bad Debt Expense $8,400Allowance for Doubtful Accts $8,400

Accounts ReceivableDoubtful Receipts

Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

Accts Receivable Beg. Bal. $300,000Allow. for doubtful Accts. Beg. Bal $18,000

Accts Receivable End. Bal $440,000Required AFDA End. Bal $26,400

Required Entry to Adjust Allowance for doubtful accounts(percentage of receivables method):

Bad Debt Expense $8,400Allowance for Doubtful Accts $8,400

Need to add $8,400 to beginning balance to meet required ending balance.

Accounts ReceivableSales Returns and Allowances

Returns and allowances are handled in the same manner as doubtful collection. An account called Allowance for Sales Returns is set up based on management’s best estimate for returns.

Notes Receivable

• A written promise to pay• Usually longer-term and more formal• Usually for a stated amount and a specified period • Either formally stated or implicit interest rate

Notes Receivable

• A written promise to pay• Usually longer-term and more formal• Usually for a stated amount and a specified period • Either formally stated or implicit interest rate

Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount.

Notes Receivable

• A written promise to pay• Usually longer-term and more formal• Usually for a stated amount and a specified period • Either formally stated or implicit interest rate

Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount.

For example, a $1,000, 1-year note (with no stated interest rate) that sells for $900 has an implied interest rate of 11.1%.

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value.

Notes Receivable

Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value.

Short-term notes can be carried at face value, since they will likely not suffer from inflation.

Valuing Notes Receivable

To properly value long-term notes, we need the following information:

Valuing Notes Receivable

To properly value long-term notes, we need the following information:

• Stated interest rate• Date of issue• Interest payment schedule• Principal payment schedule (usually end of note term)• Market interest rate for similar risk note (discount rate)

Valuing Notes Receivable

Using this information, do the following:

Valuing Notes Receivable

Using this information, do the following:

1. Set up repayment timeline.

Valuing Notes Receivable

Using this information, do the following:

1. Set up repayment timeline.2. Plot actual cash inflows on timeline, using

stated interest rate and face value of the note.

Valuing Notes Receivable

Using this information, do the following:

1. Set up repayment timeline.2. Plot actual cash inflows on timeline, using

stated interest rate and face value of the note.3. Discount plotted cash inflows using market

equivalent-risk rate of interest (discount rate).

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

1. Set up repayment timeline.

Year0

Year2

Year1

Year3

Year4

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $0 $0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

Assume discount rate = 7%.

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

Assume discount rate = 7%.

Therefore, discount multiplier =1

1.07year

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

0 x 1/1.070

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

$0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

$0 $0

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

$0 $0 $0 $0 10,000 x 1/1.074

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Year0

Year2

Year1

Year3

Year4

$0 $0 $0 $0 $10,000

$0 $0 $0 $0 $7,629

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

The journal entry to record this note is:

Valuing Notes Receivable

Example: 4 year note; no stated interest; $10,000 face value

The journal entry to record a purchase of this note for cash is:

Notes Receivable $10,000Discount, Notes Rec. $2,371Cash $7,629

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

1. Set up repayment timeline.

Year0

Year2

Year1

Year3

Year4

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900 $900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

9% x $10,000of interest paid annually

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

2. Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

Repayment of principal (stated amount) at the maturity of note

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

Assume discount rate = 13%.

Therefore, discount multiplier =1

1.13year

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0 900 x 1/1.131

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0 $796

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

$0 $796 $705 $624 $6,685

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

3. Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

NPV = 796 + 705 + 624 + 6,685 = $8,810

$0 $900 $900 $900

$0 $796 $705 $624 $6,685

$900$10,000

Valuing Notes Receivable

The journal entry to record a purchase of this note for cash is:

Notes Receivable $10,000Discount, Notes Rec. $1,190Cash $8,810

Example: 4 year note; 9% stated interest; $10,000 face value

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

Now assume that inflation is low, so discount rate is only 6%.

Assume discount rate = 6%.

Therefore, discount multiplier =1

1.06year

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

$0 $849 $801 $756 $8,634

$900$10,000

Valuing Notes Receivable

Example: 4 year note; 9% stated interest; $10,000 face value

Year0

Year2

Year1

Year3

Year4

$0 $900 $900 $900

$0 $849 $801 $756 $8,634

$900$10,000

NPV = 849 + 801 + 756 + 8,634 = $11,040

Valuing Notes Receivable

The journal entry to record a purchase of this note for cash is:

Notes Receivable $10,000Premium, Notes Rec. $1,040

Cash $11,040

Example: 4 year note; 9% stated interest; $10,000 face value

Valuing Notes Receivable

The journal entry to record a purchase of this note for cash is:

Notes Receivable $10,000Premium, Notes Rec. $1,040

Cash $11,040

Example: 4 year note; 9% stated interest; $10,000 face value

The premium reflects the amount we overpay in order to get a note with an interest rate that pays more than the inflation rate.

Notes ReceivableAmortization of Discount

Notes ReceivableAmortization of Discount

Go back to our 13% interest rate example:

The journal entry to record a purchase of this note for cash is:

Notes Receivable $10,000Discount, Notes Rec. $1,190Cash $8,810

Example: 4 year note; 9% stated interest; $10,000 face value

Notes ReceivableAmortization of Discount

Go back to our 13% interest rate example:

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Carrying value x interest rate (discount rate) – interest actually paid

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Year 1 amortization =

Carrying value x interest rate (discount rate) – interest actually paid

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Year 1 amortization = (8,810 x 0.13)

Carrying value x interest rate (discount rate) – interest actually paid

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Year 1 amortization = (8,810 x 0.13) - 900

Carrying value x interest rate (discount rate) – interest actually paid

Notes ReceivableAmortization of Discount

At date of purchase, the balance sheet carries the note:

Note Receivable $10,000Less: Discount $1,190Carrying Value $8,810

Amortization amount each year =

Year 1 amortization = (8,810 x 0.13) – 900 = $245

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0

1

2

3

4

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0 --- --- --- --- 8,810

1 8,810 0.13 900 245

2

3

4

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0 --- --- --- --- 8,810

1 8,810 0.13 900 245 9,055

2 9,055

3

4

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0 --- --- --- --- 8,810

1 8,810 0.13 900 245 9,055

2 9,055 0.13 900 277

3

4

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0 --- --- --- --- 8,810

1 8,810 0.13 900 245 9,055

2 9,055 0.13 900 277 9,332

3 9,332 0.13 900 313 9,645

4 9,645

Notes ReceivableAmortization of Discount

So, we can set up an annual amortization table:

Year (a)

Beg. Carrying

Value

(b)

Interest Rate

(c)

Interest Actually

Paid

(d)

Amortization

Amount

[(a) x (b)] – (c)

Ending Carrying

Value

(a) + (d)

0 --- --- --- --- 8,810

1 8,810 0.13 900 245 9,055

2 9,055 0.13 900 277 9,332

3 9,332 0.13 900 313 9,645

4 9,645 0.13 900 354 10,000

Notes ReceivableAmortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount

amortized (or – the amount of premium amortized)

Notes ReceivableAmortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount

amortized (or – the amount of premium amortized)

Journal entry to record receipt of year 1 interest:

Notes ReceivableAmortization of Discount

Actual interest revenue reported each year is equal to actual interest paid + the amount of discount

amortized (or – the amount of premium amortized)

Journal entry to record receipt of year 1 interest:

Cash $900Disc, Notes Rec $245

Interest Revenue, Notes Rec $1,145