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Questions and Answers
How are notes receivable classified based on the presence of a stated interest rate?
How are notes receivable classified based on the presence of a stated interest rate?
What is the face amount of a noninterest-bearing note composed of?
What is the face amount of a noninterest-bearing note composed of?
How are receivables initially recognized for measurement purposes?
How are receivables initially recognized for measurement purposes?
Which term refers to the contracted interest rate stated on the promissory note?
Which term refers to the contracted interest rate stated on the promissory note?
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What does a negotiable instrument allow the holder to do?
What does a negotiable instrument allow the holder to do?
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How do entities classify notes receivable based on the presence of a reasonable interest rate?
How do entities classify notes receivable based on the presence of a reasonable interest rate?
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What is the fair value of a short-term receivable that contains a significant financing component?
What is the fair value of a short-term receivable that contains a significant financing component?
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How is the fair value of long-term noninterest bearing receivables determined?
How is the fair value of long-term noninterest bearing receivables determined?
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What is the difference between face amount and present value in the initial recognition of receivables?
What is the difference between face amount and present value in the initial recognition of receivables?
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Under PFRS 15, how should trade receivables without a significant financing component be measured?
Under PFRS 15, how should trade receivables without a significant financing component be measured?
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What term is synonymous with imputed interest rate for long-term receivables?
What term is synonymous with imputed interest rate for long-term receivables?
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How is unearned interest recognized in the accounting of long-term receivables?
How is unearned interest recognized in the accounting of long-term receivables?
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Study Notes
Classification of Notes Receivable
- Notes receivable are classified based on the presence of a stated interest rate, distinguishing between interest-bearing and noninterest-bearing notes.
- If a note lacks a stated interest rate, it is considered noninterest-bearing, implying that the face amount does not accrue additional interest.
Face Amount of Noninterest-Bearing Notes
- The face amount of a noninterest-bearing note is composed solely of the principal amount due at maturity without any interest payments.
Initial Recognition of Receivables
- Receivables are initially recognized at their fair value for measurement purposes, which includes the consideration received and any transaction costs.
Contracted Interest Rate
- The term for the contracted interest rate stated on a promissory note is called the "stated interest rate."
Function of Negotiable Instruments
- A negotiable instrument allows the holder to transfer the instrument to another party, providing ease of transferability and liquidity in financial transactions.
Classification of Notes Receivable with Reasonable Interest Rates
- Entities classify notes receivable with a reasonable interest rate as interest-bearing, ensuring that the effective interest reflects the time value of money.
Fair Value of Short-Term Receivables
- The fair value of a short-term receivable that contains a significant financing component is typically equivalent to its face value.
Fair Value Determination for Long-Term Noninterest-Bearing Receivables
- The fair value of long-term noninterest-bearing receivables is determined by discounting future cash flows to present value using an appropriate market interest rate.
Face Amount vs. Present Value
- The difference between face amount and present value in receivables' initial recognition reflects the time value of money, with present value accounting for the interest component that accrues over time.
Measurement of Trade Receivables under PFRS 15
- Under PFRS 15, trade receivables that do not contain a significant financing component should be measured at their transaction price without any adjustments for financing.
Synonymous Term for Imputed Interest Rate
- The term "effective interest rate" is synonymous with the imputed interest rate for long-term receivables, reflecting the true cost of borrowing over the asset's life.
Accounting for Unearned Interest in Long-Term Receivables
- Unearned interest associated with long-term receivables is recognized as a reduction in the carrying value of the receivable, amortized over the life of the note.
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Description
Test your knowledge on long-term receivables and notes receivable, including the characteristics and classification of notes as interest-bearing or non-interest-bearing.
