# FAR

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Question 1

On December 31, Key Co. received two \$10,000 non-interest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of \$1 due in nine months at 8% is .944. The present value of \$1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key's December 31 balance sheet?

Alpha

Omega

a.

\$10,000

\$8,570

b.

\$10,000

\$10,000

c.

\$9,440

\$8,570

d.

\$9,440

\$10,000

Question 2

On December 31, Jet Co. received two \$10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31 was 8%. The compound interest factors to convert future values into present values at 8% follow:

Present value of \$1 due in nine months:

0.944

Present value of \$1 due in five years:

0.680

At what amounts should these two notes receivable be reported in Jet's December 31 balance sheet?

Hart

Maxx

a.

\$9,440

\$6,800

b.

\$10,000

\$6,800

c.

\$10,000

\$7,820

d.

\$9,652

\$7,820

thank you so much for all of your help!

Anything that is notated as being made under “customary” terms should be listed at the face value of the note. So you can disregard the present value number given in that case.

A difference is that Jet and Maxx is a note receivable with an annual interest rate of 3% and as such, you will need to correct the maturity value for Maxx to reflect the current face value PLUS the interest over the term (10000+(10000*3%*5 years))*Present Value factor.

You wouldn't need to do this for Key for A and O because the notes are non-interest bearing.

(I missed both of these the first time around too…)

Anything that is notated as being made under “customary” terms should be listed at the face value of the note. So you can disregard the present value number given in that case.

A difference is that Jet and Maxx is a note receivable with an annual interest rate of 3% and as such, you will need to correct the maturity value for Maxx to reflect the current face value PLUS the interest over the term (10000+(10000*3%*5 years))*Present Value factor.

You wouldn't need to do this for Key for A and O because the notes are non-interest bearing.

(I missed both of these the first time around too…) Aratrika Datta