Chapter 23 - Notes Receivable

Question 1

What are Notes Receivable?

Answer 1

Formal written promises to pay; always include interest; supported by a promissory note.

Question 2

Who are the two parties in a note?

Answer 2

Note holder → has asset; will receive cash

Note maker → has liability; must pay cash

Question 3

What do notes receivable typically specify?

Answer 3

Principal, interest rate, repayment terms, maturity date, and possibly collateral/covenants.

Question 4

How do Notes Receivable differ from Accounts Receivable?

Answer 4

Notes are formal, interest-bearing from day 1, may be long-term, and include detailed terms/security.

Question 5

How are Notes Receivable initially measured?

Answer 5

At fair value = cash price or present value of future payments.

Question 6

When is a note recorded at face value?

Answer 6

When the stated interest rate = market rate.

Question 7

When must you use present value to record a note?

Answer 7

Stated interest ≠ market rate

Non-interest-bearing note

Implied interest exists

Question 8

What is a non-interest-bearing note?

Answer 8

A note with no stated interest; recorded at PV; difference between FV and PV = interest income.

Question 9

What is the effective interest method?

Answer 9

Required under IFRS; interest revenue = opening carrying amount × market rate; difference adjusts carrying amount.

Question 10

What is the straight-line interest method?

Answer 10

Interest income is spread evenly across periods (GAAP alternative, not IFRS).

Question 11

How are notes receivable subsequently measured?

Answer 11

At amortized cost
= initial PV + accrued interest − cash payments received.

Question 12

How do you calculate interest for short-term notes?

Answer 12

Interest = principal × stated rate × portion of year.

Question 13

What Excel shortcuts relate to PV calculations?

Answer 13

NPER = number of periods

RATE = market interest

PMT = periodic interest

FV = principal

PV = present value today

Question 14

What is the journal entry for converting A/R to a note?

Answer 14

Dr Notes Receivable
Cr Accounts Receivable

Question 15

How is interest recorded on a converted note?

Answer 15

Example:
Dr Cash
Cr Notes Receivable
Cr Interest Revenue

Question 16

What is impairment of notes receivable?

Answer 16

Reduction in carrying value when note is not fully collectible; similar to A/R impairment.

Question 17

What is the journal entry for impairment of a note?

Answer 17

Dr Bad Debt Expense
Cr Allowance for Doubtful Accounts

Question 18

What is derecognition of a note?

Answer 18

Removing note when collected or written off.

Question 19

What is the collection entry for a note receivable?

Answer 19

Dr Cash
Cr Notes Receivable

Question 20

What happens if stated ≠ market rate?

Answer 20

Use market rate to discount all cash flows (interest + principal) to PV.