CHAPTER 7 EXAMPLES CHAPTER 7 EXAMPLES

September 2003September 2003

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000

Maturity value $10,000 Maturity value $10,000 Matures on Matures on December 31, 2003December 31, 2003

Market rate of interest 9%Market rate of interest 9%

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

n = 3 yearsn = 3 yearsi = 9%i = 9%fv = $10,000fv = $10,000pv = ?pv = ?

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

12-31-00 Note receivable12-31-00 Note receivable 10,00010,000

Discount on noteDiscount on note 2,278 2,278Sales revenueSales revenue 7,722 7,722

To record sale for note to Customer SmithTo record sale for note to Customer Smith

Note ReceivableNote Receivable

10,00010,000

DiscountDiscount

2,2782,278

SalesSales

7,7227,722

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

12-31-01 Discount on note12-31-01 Discount on note 695695

Interest incomeInterest income 695 695

To record interest on note for 2001 To record interest on note for 2001 ( $7,722 X 9%)( $7,722 X 9%)

Note ReceivableNote Receivable

10,00010,000

DiscountDiscount

695695 2,278 2,278

1,5831,583

Interest incomeInterest income

695695

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

12-31-02 Discount on note12-31-02 Discount on note 758758

Interest incomeInterest income 758 758

To record interest on note for 2002 To record interest on note for 2002 ( $8,417 X 9%)( $8,417 X 9%)

Note ReceivableNote Receivable

10,00010,000

DiscountDiscount

758758 1,583 1,583

825825

Interest incomeInterest income

758758

NON-INTEREST BEARING NON-INTEREST BEARING NOTE RECEIVABLENOTE RECEIVABLE

12-31-03 Cash12-31-03 Cash 10,00010,000

Discount on noteDiscount on note 825 825

Note receivable 10,000Note receivable 10,000 Interest income Interest income 825 825

To record maturity of & interest on note To record maturity of & interest on note ( $9,175 X 9%)( $9,175 X 9%)

Note ReceivableNote Receivable

10,00010,000 10,000 10,000

00

DiscountDiscount

825825 825 825

00

Interest incomeInterest income

825825

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000

Principal $100,000Principal $100,000Stated interest of 8% Stated interest of 8% Matures on December 31, 2003Matures on December 31, 2003Market rate of interest 10%Market rate of interest 10%

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

n = 3 yearsn = 3 yearsi = 10%i = 10%fv = $100,000fv = $100,000pmt = $8,000pmt = $8,000pv = ?pv = ?

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

pv = $95,026pv = $95,026pv of single amountpv of single amount

of $100,000 = $75,131of $100,000 = $75,131pv of annuity of $8,000 = $19,895pv of annuity of $8,000 = $19,895$75,131 + 19,895 = $95,026$75,131 + 19,895 = $95,026

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

12-31-00 Note receivable12-31-00 Note receivable 100,000100,000

Discount on noteDiscount on note 4,974 4,974Sales revenueSales revenue 95,026 95,026

To record sale for note to Customer SmithTo record sale for note to Customer Smith

Note ReceivableNote Receivable

100,000100,000

DiscountDiscount

4,9744,974

SalesSales

95,02695,026

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

12-31-01 Cash 8,00012-31-01 Cash 8,000

Discount on noteDiscount on note 1,5031,503

Interest incomeInterest income 9,503 9,503

To record interest on note for 2001 To record interest on note for 2001 ( $95,026 X 10%)( $95,026 X 10%)

Note ReceivableNote Receivable

100,000100,000

DiscountDiscount

1,5031,503 4,974 4,974

3,4713,471

Interest incomeInterest income

9,5039,503

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

12-31-02 Cash 8,00012-31-02 Cash 8,000

Discount on noteDiscount on note 1,653 1,653

Interest incomeInterest income 9,653 9,653

To record interest on note for 2002 To record interest on note for 2002 ( $96,529 X 10%)( $96,529 X 10%)

Note ReceivableNote Receivable

100,000100,000

DiscountDiscount

1,6531,653 3,471 3,471

1,8181,818

Interest incomeInterest income

9,6539,653

INTEREST BEARING NOTE INTEREST BEARING NOTE RECEIVABLERECEIVABLE

12-31-03 Cash12-31-03 Cash 108,000 108,000

Discount on noteDiscount on note 1,818 1,818

Note receivable 100,000Note receivable 100,000 Interest income Interest income 9,818 9,818

To record maturity of & interest on note To record maturity of & interest on note ( $98,182 X 10%)( $98,182 X 10%)

Note ReceivableNote Receivable

100,000 100,000100,000 100,000

00

DiscountDiscount

1,818 1,818 1,818 1,818

00

Interest incomeInterest income

9,8189,818

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

Accepted for sale of goods on Accepted for sale of goods on December 31, 2000December 31, 2000

Maturity value of $5,000Maturity value of $5,000Stated interest of 12% Stated interest of 12% Matures in 90 daysMatures in 90 days

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

12-31-00 Note receivable12-31-00 Note receivable 5,0005,000

Sales revenueSales revenue 5,000 5,000To record sale for note to Warren PeaceTo record sale for note to Warren Peace

Note ReceivableNote Receivable

5,0005,000

SalesSales

5,0005,000

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

1-31-01 Interest receivable1-31-01 Interest receivable 5050

Interest incomeInterest income 50 50

To record interest on note for January To record interest on note for January ($5,000 X 12% X 30/360)($5,000 X 12% X 30/360)

Note ReceivableNote Receivable

5,0005,000

Interest Interest receivable receivable

5050

Interest incomeInterest income

5050

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

Discount note at bank at 14% on 1- 31-01Discount note at bank at 14% on 1- 31-01Face value of note Face value of note $5,000$5,000

Interest due at maturity at 12% Interest due at maturity at 12% 150150

Maturity value Maturity value 5,150 5,150

Discount (5,150 X 14% X 60/360) Discount (5,150 X 14% X 60/360) 120120

Total proceeds Total proceeds 5,030 5,030

Book value Book value 5,0505,050

Loss on discounting note Loss on discounting note $ 20$ 20

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

1-31-01 Cash1-31-01 Cash 5,030 5,030

Loss from discounting noteLoss from discounting note 20 20

Notes receivable discounted 5,000Notes receivable discounted 5,000

Interest receivableInterest receivable 50 50

To record loss on discount of noteTo record loss on discount of note

Note ReceivableNote Receivable

5,0005,000

Note Note discounteddiscounted

5,0005,000

Loss from note Loss from note discountingdiscounting

2020

DISCOUNTING NOTE DISCOUNTING NOTE RECEIVABLERECEIVABLE

PRESENTATION ON BALANCE SHEETPRESENTATION ON BALANCE SHEET

NOTES RECEIVABLENOTES RECEIVABLE 5,0005,000

NOTES RECEIVABLE DISCOUNTED NOTES RECEIVABLE DISCOUNTED (5,000)(5,000)

NOTES RECEIVABLE, NET 0NOTES RECEIVABLE, NET 0

OR DISCLOSE CONTINGENT LIABILITY IN NOTEOR DISCLOSE CONTINGENT LIABILITY IN NOTE

IF NOTE RECEIVABLEIF NOTE RECEIVABLEHONOREDHONORED

NOTES RECEIVABLE DISCOUNTED 5,000NOTES RECEIVABLE DISCOUNTED 5,000

NOTES RECEIVABLENOTES RECEIVABLE 5,000 5,000

IF NOTE RECEIVABLEIF NOTE RECEIVABLEDISHONOREDDISHONORED

NOTES RECEIVABLE DISCOUNTED 5,000NOTES RECEIVABLE DISCOUNTED 5,000

NOTES RECEIVABLE DISHONORED 5,180NOTES RECEIVABLE DISHONORED 5,180

NOTES RECEIVABLENOTES RECEIVABLE 5,000 5,000

CASHCASH 5,180 5,180

($5,150 MATURITY VALUE + $30 BANK FEE = $5,180)($5,150 MATURITY VALUE + $30 BANK FEE = $5,180)

ASSIGNING/PLEDGINGASSIGNING/PLEDGINGSeparate borrowing from Separate borrowing from

receivables in your mindreceivables in your mindJust a loanJust a loanJust normal receivablesJust normal receivablesBUTBUT cash from receivables cash from receivables

pays down the loan principalpays down the loan principal

FACTORINGFACTORINGYou sold an asset (just like equipment)You sold an asset (just like equipment)Total of receivables soldTotal of receivables soldCash proceeds receivedCash proceeds receivedAmount withheld “DUE FROM Amount withheld “DUE FROM

FACTOR” (Cushion for factor)FACTOR” (Cushion for factor)Additional liability “RECOURSE Additional liability “RECOURSE

LIABILITY” (LIABILITY” (MoreMore cushion!) cushion!)Loss on sale Loss on sale

FACTORINGFACTORING

The Factor calls the shotsThe Factor calls the shotsVery expensive way to get cashVery expensive way to get cashVery poor liquidityVery poor liquidityYou need the factor but he You need the factor but he

doesn’t need youdoesn’t need you