Zero-interest note rule:
PV = cash-selling price of the asset.
Discount = Face – PV.
Interest expense each period = carrying value × market rate.
Amortization increases CV.
Covenant violation rule:
If you violate a covenant and no waiver exists by the balance sheet date, the debt becomes current, even if the waiver comes later before issuance.
Waiver received before B/S date → stays long-term.
Issuance costs
subtract from bond liability (they lower CV)
Face: $1,000,000
Issued at 104 → proceeds: $1,040,000 (premium $40,000)
Issuance costs: $20,000, which reduce the carrying value, not interest rate
So initial carrying value (CV):
CV = Face + Premium – Issuance costs
CV = 1,000,000 + 40,000 – 20,000 = 1,020,000
FOB Destination → record when delivered.
Missing invoice? Doesn’t matter.
Perpetual → Dr Inventory
Periodic → Dr Purchases
Escrow Liability Formula:
Begin
Receipts
Customer’s share of interest
– Payments
= Ending escrow liability
Maintenance fees reduce the interest credited to liability — not the liability itself.FG
Sales tax becomes a liability when collected, not when remitted.
When customers pay → liability increases
* When company remits to the state → liability decreases
* No sales tax expense exists — company acts as a collection agent
* Unremitted tax at year-end must be shown as a current liability
Sales tax collected is NOT revenue — it is a liability.
Ending Sales Tax Payable =
(Current-year sales × tax rate)
Prior-year sales tax payable
– Sales tax remitted during the year
Sales tax is recorded as:
Dr Cash
Cr Sales
Cr Sales Tax Payable
Current portion of LT debt =
Principal payments due in next 12 months.
Any unpaid interest that will be paid within 12 months =
CURRENT liability.
A short-term obligation can be classified as noncurrent if:
1️⃣ It is refinanced on a long-term basis, AND
2️⃣ The refinancing is completed OR firmly committed before FS issuance.
If refinancing happens after issuance → must stay current.
The present value of $1
Todays value of a lump sum amount to be received in the future
Ordinary Annuity
Payments are made at the END of each period.
Think: end-of-month, end-of-year, end-of-quarter.
Annuity Due
Payments are made at the BEGINNING of each period.
Think: rent, lease payments, prepayments.
PV of $1
1️⃣ Find the Future Value (FV)
= Principal
Stated interest for the period
(Use stated rate × principal × time)
2️⃣ Identify the correct discount rate
= Market (effective) rate, not the stated rate.
3️⃣ Select the correct PV of $1 factor
Match the factor to:
market rate
number of periods (months/years)
4️⃣ Compute Present Value (PV)
PV = FV \times \text{PV of $1 factor}
5️⃣ Record the note payable at PV
FV – PV = discount, which will be amortized as interest expense.
Flashcard — Converting PV → FV
Because PV = FV × factor
→ FV = PV ÷ PV factor
Use when the table only gives PV-of-$1 factors
If FV factor is given
FV = PV * FV Factor
Note Payable (carrying value) =
Beginning balance − principal paid
Interest expense does not change the liability balance.
Only principal does.
How do you calculate the required annual payment (PMT) to reach a future value goal using time value of money?
Use the formula:
PMT=
Future Value (FV) / Future Value Factor for Annuity (ordinary or due)
Use ordinary annuity factor if payments are made at end of each year.
Use annuity due factor if payments are made at beginning of each year.
When do you use the annuity due factor instead of ordinary annuity?
When the first payment is made immediately, at the start of the first period (e.g., September 1, Year 1). This is an annuity in advance — payments occur at the beginning, not end, of each period.
A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?
At the face amount minus a discount calculated at the imputed interest rate is correct.
The proper presentation is to show the face value minus the discount that is calculated. We always want to capture liabilities on the balance sheet at an amount that is as close to fair value as possible.
How is a non-interest-bearing note payable presented when issued in exchange for services valued below face?
It is recorded and presented at the fair value of the services received (i.e., its present value). The difference between face and present value is a discount, amortized as interest over the note’s life.
Face value of note payable: $10,000
Fair value of services received: $8,500
Term of the note: 2 years
No stated interest rate
Dr. Service Expense $8,500
Dr. Discount on Note Payable $1,500 ← This is the plug (interest)
Cr. Note Payable $10,000
🧠 The $1,500 difference is treated as a discount — essentially implied interest — because you’re paying more ($10K) than the services were worth ($8.5K).
The discount resulting from the determination of a note payable’s present value should be reported on the balance sheet as a (an):
Direct reduction from the face amount of the note is correct.
The note payable will be presented at its present value which will be the gross payable net of the discount. Therefore, the discount will simply be reported as a reduction to the note’s face value amount.
Interest on Discounted Note
Interest expense each period = Beginning CV × market rate
Start with PV (not face)
Multiply by effective (market) rate
Credit goes to Discount on NP (increasing CV)
What Happens If Refinanced After FS Are Issued?
If refinancing occurs after the FS are issued:
It must remain current,
And the refinancing is disclosed as a subsequent event only.
Example: FS issued March 1st
12/31/Y1: $900,000 note due in 3 months
2/1/Y2: Company issues long-term bonds and refinances full amount
3/1/Y2: Financial statements issued
Classification at 12/31/Y1:
Current liability: $0
Long-term liability: $900,000
Because refinancing was completed before FS issuance.
Zero-interest-bearing notes
ONE future cash flow
(the principal paid at maturity)
There were NO interest payments to discount
When to discount interest payments
Discount the interest payments when the note is interest-bearing AND the stated rate ≠ market rate
Why?
Because the cash interest payments are part of the total borrowing cost, and they occur over multiple years → annuity.
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INTERCO TRANS17
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Equity Method19
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General Terms1
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Balance Sheet - Assets - Cash & Cash Equivalents8
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Balance Sheet - Assets - Trade Receivables24
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Balance Sheet - Assets - Inventory2
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FAR – Week 1: Conceptual Framework & Financial Statements52
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FAR - Week 1: Income Statement15
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Liabilities54
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Stockholders Equity11
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EPS66
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REVENUE RECOGNITION65
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MINI EXAM 18
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F3 ASSETS58
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F4 LIABILITIES38
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F5 Investments, Statement of Cash Flows, and Income Taxes11
