Question

On December 31, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in 9 months, was made under customary trade terms, but the note from Omega Co., which is due in 2 years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in 9 months at 8% is .944. The present value of $1 due in 2 years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31 balance sheet?

Answer 1

Answer:

Alpha Co.'s note should be reported at $10,000

Omega Co.'s note should be reported at $8,570

Explanation:

Notes receivables that represent current accounts (due within one year) should be reported at face value. Alpha's note is due in nine months, so it should be reported at = $10,000

Omega's note must be recorded at present value because it is due in 2 years.

present value = future value x 8% discount rate for 2 years = $10,000 x 0.857 = $8,570