1. Accounts Receivable Generally, two major issues: How to Record Sales Discounts

2. Accounts Receivable Generally, two major issues: How to Record Sales Discounts How to Record Doubtful Receipts

3. Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account.

4. Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10, n/30

5. Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10, n/30 2% discount if paid within 10 days

6. Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10, n/30 Net amount due in 30 days.

7. Accounts Receivable Discounts Two methods to record the discount: Gross Method: record primary sale at gross amount

8. Accounts Receivable Discounts Two methods to record the discount: Gross Method: record primary sale at gross amount Usually for firms whose clients generally don’t take advantage of the discounts

9. Accounts Receivable Discounts Two methods to record the discount: Gross Method: record primary sale at gross amount Net Method: record primary sale at net-of-discount amount

10. Usually for firms whose clients generally take advantage of the discounts Accounts Receivable Discounts Two methods to record the discount: Gross Method: record primary sale at gross amount Net Method: record primary sale at net-of-discount amount

11. Accounts Receivable Discounts Example: Jan 1 st, sell $10,000 of product under 2/10, n/30 terms.

12. Gross Method Jan 1Accts Rec10,000 Sales10,000 Accounts Receivable Discounts Example: Jan 1 st, sell $10,000 of product under 2/10, n/30 terms.

13. Accounts Receivable Discounts Example: Jan 1 st, sell $10,000 of product under 2/10, n/30 terms. Recorded as if discount won’t be taken Gross Method Jan 1Accts Rec10,000 Sales10,000

14. Accounts Receivable Discounts Example: Jan 1 st, sell $10,000 of product under 2/10, n/30 terms. Gross Method Jan 1Accts Rec10,000 Sales10,000 Net Method Jan 1Accts Rec9,800 Sales9,800

15. Accounts Receivable Discounts Example: Jan 1 st, sell $10,000 of product under 2/10, n/30 terms. Gross Method Jan 1Accts Rec10,000 Sales10,000 Net Method Jan 1Accts Rec9,800 Sales9,800 Recorded as if discount will be taken

16. Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period

17. Gross Method Jan 9Cash9,800 Sales Discs200 Accts Rec10,000 Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period

18. Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9Cash9,800 Sales Discs200 Accts Rec10,000 If the discount is actually realized, it is recorded upon receipt of the cash payment. Sales Discounts is a contra-revenue account.

19. Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9Cash9,800 Sales Discs200 Accts Rec10,000 Net Method Jan 9Cash9,800 Accts Rec9,800

20. Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9Cash9,800 Sales Discs200 Accts Rec10,000 Net Method Jan 9Cash9,800 Accts Rec9,800 Discount has already been recorded on sales date.

21. Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Now assume instead that the payment was sent after the discount period expired.

22. Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29Cash10,000 Accts Rec10,000

23. Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29Cash10,000 Accts Rec10,000 No correction needed, since we already assumed the discount would not be taken.

24. Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29Cash10,000 Accts Rec10,000 Net Method Jan 29Cash10,000 Accts Rec9,800 Forfeited Discount200

25. Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29Cash10,000 Accts Rec10,000 Net Method Jan 29Cash10,000 Accts Rec9,800 Forfeited Discount200 Record the forfeited discount (a revenue account).

26. Accounts Receivable Doubtful Receipts All receivables have some probability of default. The default on payment needs to be recorded appropriately.

27. Accounts Receivable Doubtful Receipts One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method.

28. Accounts Receivable Doubtful Receipts One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method. Not considered an acceptable method because it does not match revenues with costs effectively.

29. Accounts Receivable Doubtful Receipts The accepted method is called the Allowance Method.

30. Accounts Receivable Doubtful Receipts The accepted method is called the Allowance Method. An Allowance for Doubtful Accounts is set up as a contra-receivable account (contra-asset). It holds management’s best estimate for the amount of receivables that will default.

31. Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods:

32. Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods: Percentage of Sales Method: a fixed percentage of sales will be considered doubtful

33. Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods: Percentage of Sales Method: a fixed percentage of sales will be considered doubtful This is also called the income statement approach, since the estimate is based on a percentage of sales revenue.

34. Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods: Percentage of Sales Method: a fixed percentage of sales will be considered doubtful Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful

35. Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods: Percentage of Sales Method: a fixed percentage of sales will be considered doubtful Percentage of Receivables Method: a fixed percentage of the receivables balance will be considered doubtful This is also called the balance sheet approach, since the estimate is based on a percentage of a balance sheet receivable account.

36. Accounts Receivable Doubtful Receipts Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected.

37. Accounts Receivable Doubtful Receipts Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected. 2000 Credit Sales: 0.70 x $200,000 = $140,000

38. Accounts Receivable Doubtful Receipts Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected. 2000 Credit Sales: 0.70 x $200,000 = $140,000 Estimate of doubtful collections: 0.04 x $140,000 = $5,600

39. Accounts Receivable Doubtful Receipts Example: Assume Paterno Corp. has $200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected. Journal entry (percentage of sales): Bad Debt Expense$5,600 Allowance for Doubtful Accts$5,600

40. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible.

41. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000

42. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000 Accts Receivable End. Bal$440,000

43. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000 Accts Receivable End. Bal$440,000 $300,000 + $140,000 (70% of sales)

44. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000 Accts Receivable End. Bal$440,000 Required AFDA End. Bal$26,400 $440,000 x 6%

45. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000 Accts Receivable End. Bal$440,000 Required AFDA End. Bal$26,400 Required Entry to Adjust Allowance for doubtful accounts (percentage of receivables method): Bad Debt Expense$8,400 Allowance for Doubtful Accts$8,400

46. Accounts Receivable Doubtful Receipts Now assume that Paterno Corp. has $300,000 in Accounts Receivable prior to this year’s credit sales. The firm estimates that 6% of the A/R balance is not collectible. Accts Receivable Beg. Bal.$300,000 Allow. for doubtful Accts. Beg. Bal$18,000 Accts Receivable End. Bal$440,000 Required AFDA End. Bal$26,400 Required Entry to Adjust Allowance for doubtful accounts (percentage of receivables method): Bad Debt Expense$8,400 Allowance for Doubtful Accts$8,400 Need to add $8,400 to beginning balance to meet required ending balance.

47. Accounts Receivable Sales Returns and Allowances Returns and allowances are handled in the same manner as doubtful collection. An account called Allowance for Sales Returns is set up based on management’s best estimate for returns.

48. 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

49. 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.

50. 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%.

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

52. 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.

53. 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.

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

55. 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)

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

57. Valuing Notes Receivable Using this information, do the following: 1.Set up repayment timeline.

58. Valuing Notes Receivable Using this information, do the following: 1.Set up repayment timeline. 2.Plot actual cash inflows on timeline, using stated interest rate and face value of the note.

59. Valuing Notes Receivable Using this information, do the following: 1.Set up repayment timeline. 2.Plot actual cash inflows on timeline, using stated interest rate and face value of the note. 3.Discount plotted cash inflows using market equivalent-risk rate of interest (discount rate).

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

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

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

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

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

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

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

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

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

69. Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value 3.Discount plotted cash inflows using market equivalent- risk rate of interest (discount rate). Year 0 Year 2 Year 1 Year 3 Year 4 $0 $10,000 0 x 1/1.07 0

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

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

72. Valuing Notes Receivable Example: 4 year note; no stated interest; $10,000 face value 3.Discount plotted cash inflows using market equivalent- risk rate of interest (discount rate). Year 0 Year 2 Year 1 Year 3 Year 4 $0 $10,000 $0 10,000 x 1/1.07 4

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

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

75. 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

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

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

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

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

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

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

82. Valuing Notes Receivable Example: 4 year note; 9% stated interest; $10,000 face value Year 0 Year 2 Year 1 Year 3 Year 4 $0$900 3.Discount plotted cash inflows using market equivalent- risk rate of interest (discount rate). $0900 x 1/1.13 1 $900 $10,000

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

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

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

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

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

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

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

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

91. Valuing Notes Receivable 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 Example: 4 year note; 9% stated interest; $10,000 face value The premium reflects the amount we overpay in order to get a note with an interest rate that pays more than the inflation rate.

92. Notes Receivable Amortization of Discount

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

94. 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 Example: 4 year note; 9% stated interest; $10,000 face value Notes Receivable Amortization of Discount Go back to our 13% interest rate example:

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

96. 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

97. 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 =

98. Carrying value x interest rate (discount rate) – interest actually paid 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 =

99. Carrying value x interest rate (discount rate) – interest actually paid 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 = Year 1 amortization =

100. Carrying value x interest rate (discount rate) – interest actually paid 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 = Year 1 amortization = (8,810 x 0.13)

101. Carrying value x interest rate (discount rate) – interest actually paid 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 = Year 1 amortization = (8,810 x 0.13) - 900

102. Carrying value x interest rate (discount rate) – interest actually paid 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 = Year 1 amortization = (8,810 x 0.13) – 900 = $245

103. Notes Receivable Amortization of Discount So, we can set up an annual amortization table:

104. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0 1 2 3 4

105. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0--- 8,810 1 0.13900245 2 3 4

106. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0--- 8,810 1 0.139002459,055 2 3 4

107. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0--- 8,810 1 0.139002459,055 2 0.13900277 3 4

108. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0--- 8,810 1 0.139002459,055 2 0.139002779,332 3 0.139003139,645 4

109. Notes Receivable Amortization of Discount So, we can set up an annual amortization table: Year(a) Beg. Carrying Value (b) Interest Rate (c) Interest Actually Paid (d) Amortization Amount [(a) x (b)] – (c) Ending Carrying Value (a) + (d) 0--- 8,810 1 0.139002459,055 2 0.139002779,332 3 0.139003139,645 4 0.1390035410,000

110. Notes Receivable Amortization of Discount Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized)

111. Notes Receivable Amortization of Discount Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized) Journal entry to record receipt of year 1 interest:

112. Notes Receivable Amortization of Discount Actual interest revenue reported each year is equal to actual interest paid + the amount of discount amortized (or – the amount of premium amortized) Journal entry to record receipt of year 1 interest: Cash$900 Disc, Notes Rec$245 Interest Revenue, Notes Rec$1,145