On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not.

 On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31, year 1 balance sheet?



Alpha
Omega
$9,440
$8,570
$10,000
$8,570
$9,440
$10,000
$10,000
$10,000

Answer

$10,000, $8,570

 
 You Answered Correctly!
This answer is correct. Notes that arise from customers in the normal course of business and are due in one year are classified as current liabilities and recorded at their maturity value. Notes that are due in more than one year are classified as long-term liabilities and are recorded at their present value (ASC 310-10-30-2 and 835-30-25-4). This answer is correct because the Alpha note should be recorded at $10,000, and the Omega note should be recorded at its present value of $8,570 (.857 x $10,000).