Discounting notes receivable converts a note into cash before maturity. Learn how to calculate maturity value, bank discount, cash proceeds, and the gain or loss on a qualifying sale with Professor Farhat.
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This lesson supports CPA FAR and intermediate accounting study. Follow Cedar Consulting's $60,000 note to distinguish the customer's stated interest rate from the bank's discount rate, then review sale accounting, recourse obligations, secured borrowing, and initial present-value measurement.
CHAPTERS
00:00 How notes receivable are created
01:53 Why companies discount notes receivable
03:32 Practice with Farhat Lectures
04:05 Face amount, maturity value, and present value
05:49 Initial measurement versus transfer to a bank
07:23 Maturity value, bank discount, and proceeds
09:31 Cedar Consulting: $60,000 note example
11:27 The holding period and remaining discount period
13:09 Calculate maturity value and bank discount
14:59 Cash proceeds, carrying amount, and loss on sale
17:18 Journal entries and bank discount versus loss
18:33 Sale accounting versus secured borrowing
20:11 Qualifying sale with recourse
21:47 When a transfer fails sale accounting
22:42 Short-term and long-term note measurement
23:35 Stated rate versus market rate example
27:10 Initial recognition and discount on notes receivable
28:52 Effective-interest income and discount amortization
30:26 Continue practicing with Farhat Lectures
WORKED EXAMPLE: CEDAR CONSULTING
Assumptions: $60,000 principal; 10% stated annual rate; 120-day term; transfer after 45 days; 12% annual bank discount rate; 360-day year; transfer qualifies as a sale.
• Note interest: $60,000 × 10% × 120/360 = $2,000.
• Maturity value: $60,000 + $2,000 = $62,000.
• Remaining discount period: 120 − 45 = 75 days.
• Bank discount: $62,000 × 12% × 75/360 = $1,550.
• Cash proceeds: $62,000 − $1,550 = $60,450.
• Accrued interest: $60,000 × 10% × 45/360 = $750.
• Carrying amount including accrued interest: $60,750.
• Loss on sale without recourse: $60,750 − $60,450 = $300.
Accrue interest by debiting Interest Receivable $750 and crediting Interest Revenue $750. Record the sale by debiting Cash $60,450 and Loss on Sale $300, then crediting Notes Receivable $60,000 and Interest Receivable $750.
FREQUENTLY ASKED QUESTIONS
What is discounting a note receivable?
It is transferring a note to a financial institution to receive cash before the note matures. The accounting depends on whether the transfer qualifies as a sale.
How do you calculate a bank discount?
Multiply maturity value by the bank's annual discount rate and the remaining time to maturity, using the stated day-count basis.
Is the bank discount the same as the seller's loss?
No. Bank discount compares maturity value with cash proceeds. The seller's gain or loss compares proceeds with the carrying amount transferred, adjusted for any recourse obligation.
Does recourse automatically prevent sale accounting?
No. A transfer with recourse may still qualify as a sale. The lesson reviews legal isolation, the transferee's ability to pledge or exchange the asset, and the transferor's surrender of effective control.
What happens if the transfer does not qualify as a sale?
The receivable remains on the transferor's books and the cash received is recorded as a secured borrowing liability.
Which rate is used for present-value measurement?
Use the appropriate market rate to discount the contractual future cash flows. This is distinct from the bank-discount calculation in the Cedar example.
Practice the three quizzes, then visit https://FarhatLectures.com for more interactive exercises, detailed solutions, and accounting study resources. Farhat Lectures supplements your college accounting or CPA review course.
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Дата на публикация: 3 ноември, 2026
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