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 U.S. GAAP Codification Accounting Topics

 Examples of Asset Accounts

Present Value of Notes Receivable

[Key Concept]
Present value of notes receivable
= Present value of face amount + Present value of interest payments

Present value calculation is based on market interest rate.

 [Exercise 1:  Non-Interest Bearing Note Receivable] On January 1, 2011, Company A sold its products to Company B and received a non-interest bearing note with \$200,000 face amount and due on December 31, 2012.  At the time of issuance, market interest rate is 12%.  What is the present value of the note receivable?

[Solution to Exercise 1]
Market interest rate = 12%
r = 0.12 (per annual period),
n = 2 (annual periods)

Present value of face amount
= \$200,000 x Present value factor for a single payment (12%, 2 periods)
= \$200,000 x 0.7972
= \$159,440

 Present value factor for a single payment (12%, 2 periods) = 0.7972     From present value of a single payment table or Excel function --> " = PV (rate, nper, pmt, fv, type) "                           --> " = PV (12%, 2,    ,  1, 0) "                           --> 0.7972     Type = 0 or omitted, if payment is made at the end of period.             = 1, if payment is made at the beginning of period.

Present value of interest amount
= 0  (non-interest bearing note)

Present value of note receivable
= Present value of face amount + Present value of interest payments
= \$159,440 + \$0 = \$159,440

Discount on note receivable
= Face amount - Present value
= \$200,000 - \$159,440 = \$40,560

Amortization of discount on note receivable
--> Effective interest method

 Date Interest received Effective interest rate for annual period Interest income Amortization of discount Present value of note receivable 1/1/2011 \$159,440 12/31/2011 \$0 12% \$19,132 \$19,232 \$178,572 12/31/2012 \$0 12% \$21,428 \$21,428 \$200,000

Interest income
= Present value of note at the beginning of the period
x Effective interest rate for the period

[1/1/2011 - 12/31/2011]  --> \$159,440 x 12% = \$19,132
[1/1/2012 - 12/31/2012]  --> \$178,572 x 12% = \$21,428

Amortization of discount on note
= Interest income - Interest received

[1/1/2011 - 12/31/2011]  --> \$19,232 - \$0 = \$19,232
[1/1/2012 - 12/31/2012]  --> \$21,428 - \$0 = \$21,428

 [Exercise 2:  Interest Bearing Note Receivable] On January 1, 2011, Company A sold its products to Company C and received a note with \$200,000 face amount, 10% annual stated interest rate, and due on December 31, 2012.  Interest is paid annually on December 31, each year.  At the time of issuance, market interest rate is 12%.  What is the present value of the note receivable?

[Solution to Exercise 2]
Market interest rate = 12%
r = 0.12 (per annual period),
n = 2 (annual periods)

Present value of face amount
= \$200,000 x Present value factor for a single payment (12%, 2 periods)
= \$200,000 x 0.7972
= \$159,440

 Present value factor for a single payment (12%, 2 periods) = 0.7972     From present value of a single payment table or Excel function --> " = PV (rate, nper, pmt, fv, type) "                           --> " = PV (12%, 2,    ,  1, 0) "                           --> 0.7972     Type = 0 or omitted, if payment is made at the end of period.             = 1, if payment is made at the beginning of period.

Present value of interest amount
= \$20,000 x Present value factor for an ordinary annuity (12%, 2 periods)
= \$20,000 x 1.6901
= \$33,802

Annual interest amount = \$200,000 x 10% stated interest rate = \$20,000

 Present value factor for an ordinary annuity (12%, 2 periods) = 1.6901     From present value of an ordinary annuity table or Excel function --> " = PV (rate, nper, pmt, fv, type) "                           --> " = PV (12%, 2, 1 ,   , 0) "                           --> 1.6901     Type = 0 or omitted, if payment is made at the end of period.             = 1, if payment is made at the beginning of period.

Present value of note receivable
= Present value of face amount + Present value of interest payments
= \$159,440 + \$33,802 = \$193,242

Discount on note receivable
= Face amount - Present value
= \$200,000 - \$193,242 = \$6,758

Amortization of discount on note receivable
--> Effective interest method

 Date Interest received Effective interest rate for annual period Interest income Amortization of discount Present value of note receivable 1/1/2011 \$193,242 12/31/2011 \$20,000 12% \$23,189 \$3,189 \$196,431 12/31/2012 \$20,000 12% \$23,569 \$3,569 \$200,000

Interest income
= Present value of note at the beginning of the period
x Effective interest rate for the period

[1/1/2011 - 12/31/2011]  --> \$193,242 x 12% = \$23,189
[1/1/2012 - 12/31/2012]  --> \$178,572 x 12% = \$21,428

Amortization of discount on note
= Interest income - Interest received

[1/1/2011 - 12/31/2011]  --> \$23,189 - \$20,000 = \$3,189
[1/1/2012 - 12/31/2012]  --> \$23,569 - \$20,000 = \$3,569

 Tables for PV and FV Factors Table of Future Value Factors for a Single Present Amount (pdf)   Table of Present Value Factors for a Single Future Amount (pdf)   Table of Future Value Factors for an Ordinary Annuity (pdf)   Table of Present Value Factors for an Ordinary Annuity (pdf)  How to derive PV and FV factors (pdf)

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