[animalwithin]

The following question/answer confused me, specifically the bolded sentence. I thought we recored non-interest bearing notes due longer than 1 year at their discounted present value?

The cash price of a noninterest-bearing note receivable is the present value of the face amount discounted at the rate of interest implicit in the transaction. The present value of $10,000 received in 3 years discounted at 9% is ($10,000 × 0.7722% = $7,722). The difference is recorded as a discount ($10,000 – $7,722 = $2,278). A note receivable is recorded at its face amount.

Notes receivable $10,000
Discount on notes receivable $2,278
Cash 7,722

[fsugirl2005]

It is recorded at it's present value if over a year.

The journal entry you notated indicates the present value. The Notes Receivable GL account indicates the face amount of the note. The recording of the GL account Discount On NR is what makes it into present value.

Notes Receivable = Face Amount

Present Value = Face Amount(N/R) – Disc on Notes Receivable

Had you not recorded the note at present value it would have simply been:

Debit: Notes Receivable 10,000
Credit: Cash 10,000

I hope that makes sense.

AUD - 10/21/16 (75----07/2010 expired)
FAR - 10/28/16
BEC - 11/2016
REG - 01/2017

Using Gleim CPA Review, Ninja Audio, Ninja Book

[animalwithin]

Hmmmm, still a bit confused. Here was my original entry:

Note Receivable 7,722
Discount 2278
Cash 10,000

Why isn't this correct? Isn't this recording the note at it's discounted present value?

[CPAHOPE]

Just remember: Notes receivable and payable, bonds receivable and payable – they're Always recorded at face amount

Example:
Notes receivable 10k
discount 2278
Cash 7722

Bonds receivable 10k
Discount 2278
Cash 7722

Cash 7722
Discount 2278
Notes payable 10k

Cash 7722
Discount 2278
Bonds payable 10k

When you analyze it carefully, it makes intuitive sense

[CPAHOPE]

Also, you might be thinking what in the hell would you record them at face amount? Think about it. First of all, face amount is what you will either receive or pay in the future date. Also, face amount consist of both principle and interest in the form of discount or premium. If the interest and market interest rate is the same then obviously it would be principle + interest rate

[animalwithin]

So what do they mean when they say you record a non-interest bearing note (do over 1 year) at it's discounted present value if we're recording it at it's face value?

[CPAHOPE]

Like i said when you discount to find present value, the face value is always recorded at face amount. You should review present value concept again

[water]

Remember the difference between recorded value and carrying value. Recorded value is the face amount which gets booked to N/R or N/P. Carrying value is the amount NET of discount or premium that is reported on F/S (which = the present value in the case of long term receivables or liabilities). Similar to PP&E net of accumulated depreciation & A/R net of allowance for credit losses.

[CPAHOPE]

I looked into the book again and i did not consider that there is a gross and net method. Gross method is what im using and if we are using your method (net method) then it would be this below.

N/R 7722
Cash 7722

Thanks for bringing this subject, Ive forgotten the net method.

[CPAHOPE]

So it would look something like this (NET METHOD)

NR 7722
CASH 7722

NR 2278
INTEREST REV 2278

CASH 10000
NR 10000

[CPAHOPE]

Net Method will be appropriate to use to calculate gains or losses in the following transaction

Let's say youve sold an equipment with the cost of 40k and accumulated depreciation of 15k in exchange for a nonbearing interest note of 3 years, 25k, present value of 20k.

NR 20k
Loss 5k
AD 15k
Equipment 40k

[animalwithin]

Thank you both for chiming in. I'm understanding it a little better now, I think I just need to re-read what you've both said above and it'll click (hopefully). I'm at a point in studying where I'm probably overthinking many things so that might be my issue haha.

[CPAHOPE]

Great question animalwithin!
Thank you. Its important to know both methods.

[Jimmy]

I believe the net method and gross method applies to cash discounts for accounts receivable. The beginning of this thread was correct that the note receivable is recorded as a debit to N/R for 10,000, a credit to discount of NR for 2278, and a credit to cash for 7722. The reason is that the the notes actual value is reduced by the discount when presented in the balance sheet. So the notes present value or carrying amount is 7722 (10,000-2278) which is why that much cash is paid for it. Over time the discount will be amortized until the actual value of the note is 10000.

[Author]

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