Accounting for Discounted Notes
Receivable
Accounting - Discounting of Notes Receivable
Shalimar Company's Discounting Transaction
On April 1, 2016, Shalimar Company discounted a 9-month, 10% note
receivable with a face value of 6,000,000 with a bank. The bank's discount
rate was 12%.
The discounting transaction was accounted for as a conditional sale, with
recognition of a contingent liability.
On October 1, 2020, the maker of the note receivable dishonored the note.
Shalimar Company paid the bank the maturity value of the note, which was
6,450,000, plus a protest fee of 50,000.
On December 31, 2016, Shalimar Company collected the dishonored note
receivable in full, plus 12% annual interest on the total amount due.
Calculation of the Discounted Value of the Note Receivable
The discounted value of the note receivable on April 1, 2016 was calculated
as follows:
Principal: 6,000,000 Interest (6,000,000 x 10% x 9/12): 450,000 Maturity
Value: 6,450,000 Less: Bank Discount (6,450,000 x 12% x 6/12): 387,000
Discounted Value of Note: 6,063,000
Calculation of the Loss on Note Receivable Discounting
The loss on the note receivable discounting was calculated as follows:
Principal: 6,000,000 Add: Interest Earned: 150,000 Less: Discounted Value
of Note: (6,063,000) Loss: 87,000
