In general, a note receivable (N/R) is originally measured as the principal balance of the loan, reduced by an allowance for credit losses and adjusted for any discount or premium. The note is carried at amortized cost unless the fair value election is made.
A noninterest-bearing N/R may be used when selling goods or providing services. Although an interest rate is not stated, it is implied in the face value of the note, and the interest is recorded as a discount to N/R, a contra account. This type of N/R is recorded at the FMV of the goods or the N/R, whichever is more determinable. If neither is known, the present value (PV) of the future payments is used.
\begin{tabular}{|l|l|l|}
\hline \multicolumn{3}{|c|}{Noninterest-bearing note receivable*} \\
\hline Notes receivable (face value) & XXX & \\
\hline Discount on notes receivable & & XXX \\
\hline Equipment & & XXX \\
\hline Gain on sale & & XXX \\
\hline \multicolumn{3}{|c|}{*The interest is implied in the face value of the note.} \\
\hline \multicolumn{3}{|c|}{Calculating the discount} \\
\hline Face value of notes receivable & & $xxx \\
\hline Less: Present value factor $\times$ Payment & & (XXX) \\
\hline Discount on notes receivable & & $xxx \\
\hline
\end{tabular}
Answer (1)
A noninterest-bearing note receivable is recorded at the fair market value (FMV) of the goods or the note receivable, whichever is more determinable. If neither is known, the present value (PV) of the future payments is used. The implied interest is recorded as a discount to the note receivable. The discount is calculated as the difference between the face value of the note receivable and the present value of the future payments.
Explanation
Understanding the Problem We are given a description of how to account for a noninterest-bearing note receivable. The problem describes how the note is recorded, how the discount is calculated, and how the note is carried on the balance sheet.
Explanation of Accounting for Noninterest-Bearing Note Receivable A noninterest-bearing note receivable is recorded at the fair market value (FMV) of the goods or the note receivable, whichever is more determinable. If neither the FMV of the goods nor the FMV of the note receivable is determinable, the present value (PV) of the future payments is used. The implied interest is recorded as a discount to the note receivable, which is a contra account. The discount is calculated as the difference between the face value of the note receivable and the present value of the future payments. The note receivable is carried at amortized cost, which means the discount is amortized over the life of the note. The note receivable is originally measured as the principal balance of the loan, reduced by an allowance for credit losses and adjusted for any discount or premium.
Calculating the Discount The discount on notes receivable is calculated as:
Discount on notes receivable = Face value of notes receivable - (Present value factor × Payment)
Examples
Consider a scenario where a company sells equipment in exchange for a noninterest-bearing note receivable. The company needs to determine the appropriate value to record for the note receivable and the related discount. By understanding the principles of accounting for noninterest-bearing notes, the company can accurately reflect the transaction in its financial statements. This ensures that the assets and liabilities are fairly stated, providing a transparent view of the company's financial position to stakeholders.
