1 / 65

Notes Receivable

Notes Receivable. A written promise to pay Usually longer-term and more formal Usually for a stated amount and a specified period Either formally stated or implicit interest rate. Notes Receivable. A written promise to pay Usually longer-term and more formal

illias
Télécharger la présentation

Notes Receivable

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Notes Receivable • A written promise to pay • Usually longer-term and more formal • Usually for a stated amount and a specified period • Either formally stated or implicit interest rate

  2. Notes Receivable • A written promise to pay • Usually longer-term and more formal • Usually for a stated amount and a specified period • Either formally stated or implicit interest rate Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount.

  3. Notes Receivable • A written promise to pay • Usually longer-term and more formal • Usually for a stated amount and a specified period • Either formally stated or implicit interest rate Implicit interest is when there is no formally stated interest rate, but the note is priced at a discount. For example, a $1,000, 1-year note (with no stated interest rate) that sells for $900 has an implied interest rate of 11.1%.

  4. Notes Receivable Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds.

  5. Notes Receivable Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds. To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value.

  6. Notes Receivable Since notes tend to be longer-term, inflation whittles away the amount we can expect to recover from the note’s proceeds. To handle this, we generally carry long-term notes receivable on the balance sheet at their net present value. Short-term notes can be carried at face value, since they will likely not suffer from inflation.

  7. Valuing Notes Receivable To properly value long-term notes, we need the following information:

  8. Valuing Notes Receivable To properly value long-term notes, we need the following information: • Stated interest rate • Date of issue • Interest payment schedule • Principal payment schedule (usually end of note term) • Market interest rate for similar risk note (discount rate)

  9. Valuing Notes Receivable Using this information, do the following:

  10. Valuing Notes Receivable Using this information, do the following: • Set up repayment timeline.

  11. Valuing Notes Receivable Using this information, do the following: • Set up repayment timeline. • Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

  12. Valuing Notes Receivable Using this information, do the following: • Set up repayment timeline. • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

  13. Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value

  14. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Set up repayment timeline.

  15. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0

  16. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $0

  17. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $0 $0

  18. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $0 $0 $0

  19. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $0 $0 $0 $10,000

  20. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 Assume discount rate = 7%.

  21. Year 0 Year 1 Year 2 Year 3 Year 4 1 1.07year Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 Assume discount rate = 7%. Therefore, discount multiplier =

  22. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 0 x 1/1.070

  23. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 $0

  24. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 $0 $0

  25. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 $0 $0 $0 $0 10,000 x 1/1.074

  26. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $0 $0 $0 $10,000 $0 $0 $0 $0 $7,629

  27. Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value The journal entry to record this note is:

  28. Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value The journal entry to record a purchase of this note for cash is: Notes Receivable $10,000 Discount, Notes Rec. $2,371 Cash $7,629

  29. Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value

  30. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Set up repayment timeline.

  31. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $900 $900 $900 $900 $10,000

  32. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $900 $900 $900 $900 $10,000 9% x $10,000 of interest paid annually

  33. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Plot actual cash inflows on timeline, using stated interest rate and face value of the note. $0 $900 $900 $900 $900 $10,000 Repayment of principal (stated amount) at the maturity of note

  34. Year 0 Year 1 Year 2 Year 3 Year 4 1 1.13year Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $900 $900 $900 $900 $10,000 Assume discount rate = 13%. Therefore, discount multiplier =

  35. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $900 $900 $900 $900 $10,000 $0 900 x 1/1.131

  36. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $900 $900 $900 $900 $10,000 $0 $796

  37. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $900 $900 $900 $900 $10,000 $0 $796 $705 $624 $6,685

  38. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value • Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate). $0 $900 $900 $900 $900 $10,000 $0 $796 $705 $624 $6,685 NPV = 796 + 705 + 624 + 6,685 = $8,810

  39. Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value The journal entry to record a purchase of this note for cash is: Notes Receivable $10,000 Discount, Notes Rec. $1,190 Cash $8,810

  40. Year 0 Year 1 Year 2 Year 3 Year 4 1 1.06year Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value Now assume that inflation is low, so discount rate is only 6%. $0 $900 $900 $900 $900 $10,000 Assume discount rate = 6%. Therefore, discount multiplier =

  41. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value $0 $900 $900 $900 $900 $10,000 $0 $849 $801 $756 $8,634

  42. Year 0 Year 1 Year 2 Year 3 Year 4 Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value $0 $900 $900 $900 $900 $10,000 $0 $849 $801 $756 $8,634 NPV = 849 + 801 + 756 + 8,634 = $11,040

  43. Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value The journal entry to record a purchase of this note for cash is: Notes Receivable $10,000 Premium, Notes Rec. $1,040 Cash $11,040

  44. Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value The journal entry to record a purchase of this note for cash is: Notes Receivable $10,000 Premium, Notes Rec. $1,040 Cash $11,040 The premium reflects the amount we overpay in order to get a note with an interest rate that pays more than the inflation rate.

  45. Notes Receivable Amortization of Discount

  46. Notes Receivable Amortization of Discount Go back to our 13% interest rate example:

  47. Notes Receivable Amortization of Discount Go back to our 13% interest rate example: Example: 4 year note; 9% stated interest; $10,000 face value The journal entry to record a purchase of this note for cash is: Notes Receivable $10,000 Discount, Notes Rec. $1,190 Cash $8,810

  48. Notes Receivable Amortization of Discount At date of purchase, the balance sheet carries the note:

  49. Notes Receivable Amortization of Discount At date of purchase, the balance sheet carries the note: Note Receivable $10,000 Less: Discount $1,190 Carrying Value $8,810

  50. Notes Receivable Amortization of Discount At date of purchase, the balance sheet carries the note: Note Receivable $10,000 Less: Discount $1,190 Carrying Value $8,810 Amortization amount each year =

More Related