Outtakes from Very Short, But Funny Jokes – 9gag.comFrom the Files of “Can’t Make This Up”Chapter 7 CASH AND RECEIVABLES Continued Sommers – ACCT 3311Notes ReceivableNotes Receivable..Note Receivable Journal EntriesNote Receivable Journal EntriesNote Receivable Journal EntriesInterest-bearing NoteInterest-bearing NoteInterest-bearing NoteInterest-bearing NoteDiscussion QuestionDiscussion QuestionNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNon-Interest Bearing NoteNotes Received for Property, Goods or ServicesNotes Receivable ExampleDiscussion QuestionValuation of Notes ReceivableDisposition of ReceivablesDisposition of ReceivablesSecured borrowing vs. SaleSale of ReceivablesSale of ReceivablesPresentation of ReceivablesDiscussion QuestionA/R Turnover RatioIFRSIFRSIFRSReceivables Journal EntriesReceivables Journal EntriesReceivables Journal EntriesReceivables Journal EntriesReceivables Journal EntriesOuttakes from Very Short, But Funny Jokes – 9gag.com1. I went on a once in a lifetime holiday, Never again.2. Shout out to the people who want to know what the opposite of in is.3. What’s the best thing about Switzerland? I don’t know, but their flag is a huge plus.4. A Buddhist walks up to a hotdog stand and says, “Make me one with everything.”5. I’m addicted to brake fluid, but I can stop whenever I want.6. “This is your captain speaking, AND THIS IS YOUR CAPTAIN SHOUTING.”7. Velcro is a complete rip-off.8. A plateau is the highest form of flattery.9. Don’t you hate it when people answer their own questions? I do.10.I told my doctor that I broke my arm in two places. He told me to stop going to those places.11.What’s orange and sounds like a parrot? A carrot.From the Files of “Can’t Make This Up”•Email last night from student doing finance interviews:Student:“In investment banking interviews, I am liable to be asked how $10 of interest expense would flow through the financial statement. I know that Net income would be reduced by the after-tax interest expense amount, and then the SE section of the balance sheet would be decreased by that same amount (because SE starts with net income). But how would the balance sheet balance?”Me:“I will answer your question if you answer mine. What is the journal entry for the interest expense?”CHAPTER 7CASH AND RECEIVABLES CONTINUEDSommers – ACCT 3311Supported by a formal promissory note.A negotiable instrument.Maker signs in favor of a Payee.Interest-bearing (has a stated rate of interest) ORZero-interest-bearing (interest included in face amount).Notes ReceivableGenerally originate from:Customers who need to extend payment period of an outstanding receivable. High-risk or new customers.Loans to employees and subsidiaries.Sales of property, plant, and equipment.Lending transactions (the majority of notes).Notes Receivable..Note Receivable Journal EntriesOn June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation. Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold).June 30, 2011Note receivable 30,000Sales revenue 30,000Note Receivable Journal EntriesOn June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation. Prepare the journal entry at December 31, 2011.December 31, 2011Interest receivable 900Interest revenue 900 ($30,000 x 6% x 6/12) = 900Note Receivable Journal EntriesOn June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation. Prepare the journal entry at March 31, 2012.March 31, 2012Cash 31,350Interest revenue 450 Interest receivable 900Note receivable 30,000($30,000 x 6% x 3/12) = 450Illustration: Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note? 0 1 2 31,000 1,000 Interest$1,000$10,000 Principal4i = 12%n = 3Interest-bearing NoteFV=10,000, pmt=1,000, n=3, i=12% => PV=9,520Illustration: How does Morgan record the receipt of the note? Notes Receivable 10,000Discount on Notes Receivable 480Cash 9,520Interest-bearing NoteIllustration 7-15Interest-bearing NoteJournal Entries for Interest-Bearing NoteCash 1,000Discount on notes receivable 142Interest revenue 1,142Interest-bearing NoteQ7-15 What is “imputed interest”?Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest rate estimation called imputation.In what situations is it necessary to impute an interest rate for notes receivable?An interest rate is imputed for notes receivable when (1) no interest rate is stated for the transaction, or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is materially different from the current cash price for the same or similar items or from the current market value of the debt instrument.Discussion QuestionDiscussion QuestionQ7-15 Continued – What are the considerations in imputing an appropriate rate?In imputing an appropriate interest rate, consideration should be given to the prevailing interest rates for similar instruments of issuers with similar credit ratings, the collateral, and restrictive covenants.Non-Interest Bearing NoteOn April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation. Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold).FV=40,000, pmt=0, n=5, i=6%