Overview

In accounting, the confront value the a non-interest-bearing keep in mind is commonly the maturity worth of the note which is also known together future value. Likewise, the agency needs to calculation the note’s present value i beg your pardon is its fair value at the existing date prior to it deserve to make the journal entry for the non-interest-bearing note receivable.It is various from the interest-bearing note where its confront value typically represents the existing value and also its maturity worth is the total of the challenge value and the interest. ~ above the other hand, the face value of the non-interest-bearing note is the maturity value itself together it does not have actually interest attached.That is why the company needs to discount the face value of the non-interest-bearing keep in mind which is the maturity worth or the future value of the note to the present date before it can be tape-recorded on the balance sheet. This is the principle of the moment value that money wherein the money today is much more valuable 보다 the very same money receiving in the future.For example, a $1,000 non-interest-bearing keep in mind maturing in 3 month will have a value less than $1,000 today. After ~ all, this $1,000 non-interest-bearing promissory keep in mind would simply indicate that the issuer promises to salary $1,000 ~ 3 months. And that’s it; no attention nor any kind of financial value is added to this $1,000 amount at all.

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Journal entry for non attention bearing keep in mind receivable

At receiving day of non-interest-bearing noteThe agency can do the newspaper entry because that non-interest-bearing keep in mind receivable by debiting the note receivable account in ~ its fair value and also crediting the revenue account or cash account as the equivalent depending on even if it is the agency receives the promissory note for the sales or other reasons that results in the cash outflow in exchange, such together lending.AccountDebitCreditNote receivable000Revenue/cash000
In this newspaper entry, the quantity of note receivable is the fair value of the note which is the present value the the note’s face value. Likewise, the company needs to calculate the current value which is the amount to be videotaped in this journal entry by discounting the note’s face value come the present date using an appropriate discount rate.

At month-end adjusting entryAt month-end adjusting entry, the firm can make the journal entry to increase the balance the the keep in mind receivable by debiting the note receivable v the lot of current value multiplying v the discount rate.AccountDebitCreditNote receivable000Interest income000
In this newspaper entry, the balance of note receivable will boost by the quantity of interest earnings of the month. Likewise, at the end of the keep in mind maturity, the balance that non-interest-bearing note receivable will increase to the lot of its challenge value.Even though over there is no cash inflow, the agency records the credit of attention income right here in the amount of the current value multiplying through the discount rate. This is the ide of the time value the money in i beg your pardon the current value the the note will rise bit by bit as the time passes till it will the finish of the note maturity as soon as the keep in mind is honored.At honoring day of non-interest-bearing noteWhen the note is honored at the finish of the maturity, the agency can make the newspaper entry because that honoring of non-interest-bearing keep in mind by debiting cash account together it receives the money promised by the keep in mind issuer and crediting the note receivable account to eliminate the debt that the keep in mind issuer owes.

AccountDebitCreditCash000Note receivable000
By the time the non-interest-bearing note is honored, that is balance will currently equal to its confront value composed on the promissory note. Likewise, this journal entry will get rid of the debt of the note issuer together a an outcome of honoring the promissory note.

Non interest bearing note receivable example

For example, on November 1, the firm ABC obtain a $10,000 promissory note from among its client in exchange because that the items it sells to that customer. The promissory note has actually a maturity the 3 months, in which it will certainly be honored through the customer after 3 month pass.The promissory keep in mind that the company receives is the type of non-interest-bearing note in which it only states the the customer assures to salary $10,000 to the firm ABC ~ 3 months without any interest or attention rate consisted of in there.The ideal discount price is 10% per annum.What is the newspaper entry for non-interest-bearing note receivable?When the firm receives the promissory noteAt the month-end adjusting entry native the first month to the 3rd monthWhen the note is honored by the customer after 3 monthsSolution:With the info in the example, we deserve to calculate the existing value the the non-interest-bearing note as below:Present worth of the keep in mind = FV x (1/(1+r)^n)Present value of the keep in mind = $10,000 x (1/(1+10%/12)^3) = $9,754.11The “10%/12” here is to identify the monthly rate as the maturity period of the keep in mind is 3 months.After calculating the existing value the the non-interest-bearing note, we can calculate the attention each month by main point the existing value v the discount rate as below:Interest ~ above the first month = $9,754.11 x (10%/12) = $81.28.Likewise, we deserve to make the table because that the 3 month of the keep in mind as below:MonthFace ValuePV(FV*(1/(1+r)^n))Interest(PV*r)Month-endbalance110,000 9,754.11 81.28 9,835.39210,000 9,835.39 81.96 9,917.36310,000 9,917.36 82.64 10,000.00
At receiving date of the non-interest-bearing noteIn this case, the firm ABC deserve to make the newspaper entry because that non-interest-bearing keep in mind by debiting the existing value that the keep in mind which is $9,754.11 into the note receivable account together below:AccountDebitCreditNote receivable9,754.11Sales revenue9,754.11
At month-end adjusting entryAt the month-end adjusting entry, the company ABC can make the newspaper entry to rise the balance the the keep in mind receivable month by month to with its confront value as below:First monthAccountDebitCreditNote receivable81.28Interest income81.28
Second monthAccountDebitCreditNote receivable81.96Interest income81.96
Third monthAccountDebitCreditNote receivable82.64Interest income82.64
By this time, the balance of keep in mind receivable will certainly equal $10,000 ($9,754.11 + $81.28 + $81.96 + $82.64) which equates to to the confront value that the note.At honoring date of the non-interest-bearing noteWhen the keep in mind is honored by the client at the end of note maturity, the firm can make the journal entry in ~ the honoring day of the non-interest-bearing keep in mind by debit the cash that $10,000 together it receives native the customer and also crediting the $10,000 of keep in mind receivable to remove it from the balance sheet.

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AccountDebitCreditCash10,000Note receivable10,000

Calculate the present value the non interest bearing note

As mentioned, the agency needs to document the present value of the note in the newspaper entry the non-interest-bearing note receivable ~ above receiving the promissory note. In this case, the firm can calculation the existing value of non-interest-bearing note with the formula below:Formula of the present value the non-interest-bearing note:
*
Where,PV is the current value which is the fair worth of the non-interest-bearing keep in mind that the firm should document at the receiving day of the noteFV is the future worth which is the confront value that the non-interest-bearing note which is additionally the maturity worth of the note at the maturity dater is the proper discount price that is usually presented as a certain percentage every annum (e.g. 8% per annum)n is the number of the period which is normally measured as the number of years or variety of months depending upon whether the measure up of the discount price is per year or every month.For example, the non-interest-bearing keep in mind that the company XYZ obtain is a $1,000 promissory keep in mind with a 2-year maturity and an proper discount rate is 8% per annum.In this case, the agency XYZ have the right to calculate the present value the the non-interest-bearing keep in mind with the formula below:PV = FV x (1/(1+r)^n)PV = $1,000 x (1/(1+8%)^2)= $857.34As a result, the existing value of a $1,000 non-interest-bearing keep in mind with a 2-year maturity is calculate to be $857.34 making use of the discount rate of 8% per annum.