Notes Receivable: Face Value vs. Present Value | CPA FAR Question

How do you value notes receivable when the stated interest rate differs from the market rate? Work through a CPA FAR practice question comparing a nine-month trade note with a five-year note. This lesson helps intermediate accounting students apply future value and present value to a single maturity payment. You will identify when the customary short-term trade exception applies, use the stated rate to calculate contractual cash flows, and use the market rate to discount the long-term note. THE QUESTION On December 31, Year 1, Jet receives two $10,000 notes for services rendered: • Hart: due in nine months under customary trade terms. • Maxx: due in five years. Both notes bear 3% interest, compounded annually and payable at maturity. The market rate for similar notes is 8%. Jet does not elect the fair value option. HART: NINE-MONTH TRADE NOTE The example records $10,000 at the receipt date. Its customary trade terms are central to the short-term exception. No time has elapsed at that date for interest to accrue. MAXX: FIVE-YEAR NOTE Step 1 — find the contractual maturity payment using 3%. $10,000 × the supplied future-value factor of 1.1593 = $11,593. This includes both principal and compounded contractual interest. Step 2 — discount that single payment at the 8% market rate. $11,593 × the supplied present-value factor of 0.680 = $7,883.24, approximately $7,883. Using the question's rounded factors, the reported amounts are therefore Hart $10,000 and Maxx approximately $7,883, before any credit-loss allowance. The 3% rate determines the payment; the 8% rate determines its present value. WHY NOT USE AN ANNUITY FACTOR? The interest is payable at maturity, so there is one combined cash payment after five years. Annual compounding does not mean annual cash interest payments. PRECISION AND U.S. GAAP CLARIFICATIONS • The five-year note answer is about $7,883 using the supplied factors; disregard conflicting spoken/captioned amounts near 06:37–06:50. • Direct calculation without rounded factors gives $10,000 × (1.03 / 1.08)^5 ≈ $7,889.82. The difference comes from table precision, especially the supplied 0.680 discount factor. Use the factors provided when solving this question. • The short-term exception is not a blanket rule for every note under one year. ASC 835-30-15-3(a) concerns ordinary customer/supplier transactions with customary trade terms of approximately one year or less. • For revenue contracts, ASC 606-10-32-18 separately allows a financing practical expedient when, at inception, the expected gap between transferring the goods/services and payment is no more than one year. • A discount for below-market interest is separate from an allowance for expected credit losses. Applicable amortized-cost receivables also require an ASC 326 credit-loss assessment. The question provides no loss estimate and focuses on initial time-value measurement. • “Face amount” and “total maturity cash flow” differ here: the $10,000 principal grows with contractual interest. This is not a zero-interest-bearing note. CHAPTERS 00:00 Notes receivable valuation and CPA FAR 00:44 Why time value of money matters 01:31 Study resources 02:13 Read the two-note practice question 02:48 Compare stated rate, market rate and maturities 03:46 Hart's nine-month trade note 04:31 Maxx's five-year note and payment timeline 05:29 Calculate principal plus compounded interest 06:14 Discount the single maturity payment 06:46 Compare the reported note amounts 07:09 Further study and resources CONTINUE LEARNING Accounts & Notes Receivable:    • Accounts & Notes Receivable: Bad Debts, Pl...   Intermediate Accounting Course:    • Intermediate Accounting Course (I & II) | ...   Cash & Receivables Accounting:    • Cash & Receivables Accounting: Bank Reconc...   CPA FAR Practice Questions & Simulations:    • CPA FAR Practice Questions & Task-Based Si...   Additional lectures and practice: https://farhatlectures.com REFERENCE Financing guidance and the one-year expedient: https://dart.deloitte.com/USDART/home... #NotesReceivable #CPAFAR #TimeValueOfMoney