CHAPTER 7 EXAMPLES September 2003 September 2003

NON-INTEREST BEARING NOTE RECEIVABLE  Accepted for sale of goods on December 31, 2000  Maturity value $10,000  Matures on December 31, 2003  Market rate of interest 9%

NON-INTEREST BEARING NOTE RECEIVABLE  n = 3 years  i = 9%  fv = $10,000  pv = ?

NON-INTEREST BEARING NOTE RECEIVABLE Note receivable10,000 Discount on note 2,278 Sales revenue 7,722 To record sale for note to Customer Smith Note Receivable Note Receivable10,000 Discount Discount 2,278 2,278 Sales Sales7,722

NON-INTEREST BEARING NOTE RECEIVABLE Discount on note695 Interest income 695 Interest income 695 To record interest on note for 2001 ( $7,722 X 9%) To record interest on note for 2001 ( $7,722 X 9%) Note Receivable Note Receivable10,000 Discount Discount 695 2, ,278 1,583 1,583 Interest income Interest income

NON-INTEREST BEARING NOTE RECEIVABLE Discount on note758 Interest income 758 Interest income 758 To record interest on note for 2002 ( $8,417 X 9%) To record interest on note for 2002 ( $8,417 X 9%) Note Receivable Note Receivable10,000 Discount Discount 758 1, , Interest income Interest income

NON-INTEREST BEARING NOTE RECEIVABLE Cash10,000 Discount on note 825 Discount on note 825 Note receivable 10,000 Interest income 825 Note receivable 10,000 Interest income 825 To record maturity of & interest on note ( $9,175 X 9%) To record maturity of & interest on note ( $9,175 X 9%) Note Receivable Note Receivable 10,000 10,000 0 Discount Discount Interest income Interest income

INTEREST BEARING NOTE RECEIVABLE  Accepted for sale of goods on December 31, 2000  Principal $100,000  Stated interest of 8%  Matures on December 31, 2003  Market rate of interest 10%

INTEREST BEARING NOTE RECEIVABLE  n = 3 years  i = 10%  fv = $100,000  pmt = $8,000  pv = ?

INTEREST BEARING NOTE RECEIVABLE  pv = $95,026  pv of single amount of $100,000 = $75,131 of $100,000 = $75,131  pv of annuity of $8,000 = $19,895  $75, ,895 = $95,026

INTEREST BEARING NOTE RECEIVABLE Note receivable100,000 Discount on note 4,974 Sales revenue 95,026 To record sale for note to Customer Smith Note Receivable Note Receivable100,000 Discount Discount 4,974 4,974 Sales Sales 95,026 95,026

INTEREST BEARING NOTE RECEIVABLE Cash 8,000 Discount on note1,503 Discount on note1,503 Interest income 9,503 Interest income 9,503 To record interest on note for 2001 ( $95,026 X 10%) To record interest on note for 2001 ( $95,026 X 10%) Note Receivable Note Receivable100,000 Discount Discount 1,503 4,974 3,471 3,471 Interest income Interest income 9,503 9,503

INTEREST BEARING NOTE RECEIVABLE Cash 8,000 Discount on note 1,653 Discount on note 1,653 Interest income 9,653 Interest income 9,653 To record interest on note for 2002 ( $96,529 X 10%) To record interest on note for 2002 ( $96,529 X 10%) Note Receivable Note Receivable100,000 Discount Discount 1,653 3,471 1,818 1,818 Interest income Interest income 9,653 9,653

INTEREST BEARING NOTE RECEIVABLE Cash 108,000 Discount on note 1,818 Discount on note 1,818 Note receivable 100,000 Interest income 9,818 Note receivable 100,000 Interest income 9,818 To record maturity of & interest on note ( $98,182 X 10%) To record maturity of & interest on note ( $98,182 X 10%) Note Receivable Note Receivable 100, ,000 0 Discount Discount 1,818 1,818 1,818 1,818 0 Interest income Interest income 9,818 9,818

DISCOUNTING NOTE RECEIVABLE  Accepted for sale of goods on December 31, 2000  Maturity value of $5,000  Stated interest of 12%  Matures in 90 days

DISCOUNTING NOTE RECEIVABLE Note receivable5,000 Sales revenue 5,000 To record sale for note to Warren Peace Note Receivable Note Receivable 5,000 5,000 Sales Sales5,000

DISCOUNTING NOTE RECEIVABLE Interest receivable50 Interest income 50 Interest income 50 To record interest on note for January ($5,000 X 12% X 30/360) To record interest on note for January ($5,000 X 12% X 30/360) Note Receivable Note Receivable5,000 Interest receivable Interest receivable Interest income Interest income 50 50

DISCOUNTING NOTE RECEIVABLE  Discount note at bank at 14% on Face value of note $5,000 Interest due at maturity at 12% 150 Maturity value 5,150 Discount (5,150 X 14% X 60/360) 120 Total proceeds 5,030 Book value 5,050 Loss on discounting note $ 20

DISCOUNTING NOTE RECEIVABLE Cash 5,030 Loss from discounting note 20 Loss from discounting note 20 Notes receivable discounted 5,000 Interest receivable 50 To record loss on discount of note To record loss on discount of note Note Receivable Note Receivable5,000 Note discounted Note discounted 5,000 5,000 Loss from note discounting Loss from note discounting 20 20

DISCOUNTING NOTE RECEIVABLE PRESENTATION ON BALANCE SHEET NOTES RECEIVABLE5,000 NOTES RECEIVABLE5,000 NOTES RECEIVABLE DISCOUNTED (5,000) NOTES RECEIVABLE DISCOUNTED (5,000) NOTES RECEIVABLE, NET 0 OR DISCLOSE CONTINGENT LIABILITY IN NOTE

IF NOTE RECEIVABLE HONORED NOTES RECEIVABLE DISCOUNTED 5,000 NOTES RECEIVABLE 5,000 NOTES RECEIVABLE 5,000

IF NOTE RECEIVABLE DISHONORED NOTES RECEIVABLE DISCOUNTED 5,000 NOTES RECEIVABLE DISHONORED 5,180 NOTES RECEIVABLE 5,000 NOTES RECEIVABLE 5,000 CASH 5,180 ($5,150 MATURITY VALUE + $30 BANK FEE = $5,180)

ASSIGNING/PLEDGING  Separate borrowing from receivables in your mind  Just a loan  Just normal receivables  BUT cash from receivables pays down the loan principal

FACTORING  You sold an asset (just like equipment)  Total of receivables sold  Cash proceeds received  Amount withheld “DUE FROM FACTOR” (Cushion for factor)  Additional liability “RECOURSE LIABILITY” (More cushion!)  Loss on sale

FACTORING  The Factor calls the shots  Very expensive way to get cash  Very poor liquidity  You need the factor but he doesn’t need you