Present Value - Accounting Examples (for excel download: PV2)

| basic PV  | pv & accounting | annuities I  |  annuities II | Examples: 1 - PV of Note Receivable | 2 - Issuance of Bond | 3: Cash or Note Payable? | 4 A: Buying a car - interest rate? |4 B: Buying a car - payments: | Quizz Practice quizz (from an old text book, but still working)

Example 1:  Single payment Note Receivable
  • XYZ Company has sold goods in exchange for a non-interest bearing note receivable.   The note, in the amount of $6,000 is due in two years.  XYZ Co. requires a rate of return of 10% on notes of this type.  How much sales revenue should be recognized on this transaction?
  • This is an example of a single-sum present value problem

Revenue (and net accounts receivable):

  

$6,000 * PV(10%, 2)

= X

$6,000 * .82645

= X

$ 4,958.70

= X

Journal entry:
  • dr. Note receivable   $5,000
    • cr. Revenue           $4,959
    • cr. discount on N/R    $41
 On the Balance Sheet:

Note receivable (net of discount)      $4,959

 
what happens to the discount?  It becomes (is amortized as) interest income in each of the two years. (You did not really believe the company would not charge interest, did you?) using straight-line amortization:end of year1:
  • dr. discount    $ 20.50
    • cr. interest income   $ 20.50
At the end of the first year, the note will appear on the balance sheet as follows:

Note receivable (net of discount)   $4,979.50

Return to: home || basic PV  | pv & accounting | annuities I  |  annuities II | Examples: 1 - PV of Note Receivable | 2 - Issuance of Bond | 3: Cash or Note Payable? | 4 A: Buying a car - interest rate? |4 B: Buying a car - payments: | Quizz Practice quizz (from an old text book, but still working)