 Hello and welcome to the session in which we would look at a CPA question that deals with valuing notes receivable. This topic is covered in intermediate accounting as well as the FAR CPA exam. Now why value and account receivable is a little bit challenging for students. Value and account receivable require that you understand two topics. One is notes receivable, two is valuing. What do we mean by valuing? To value a notes receivable or a notes payable or leases or bonds, you have to have a good understanding of the time value of money. If you don't understand the time value of money, you'll find hard time valuing bonds, valuing leases, valuing notes receivable, notes payable. It's very important that you do that. What can I offer you? What can I do for you? Well, the difference between what I offer and your CPA service is your CPA prep course. Generally speaking, they don't spend a lot of time on the time value of money. Why not? Because they assume you learn this in college. This is true. It's a true assumption. However, you either forgot it since you learn it in college or you never learn it properly in the first place. So what you can do if you sign up on my website and under my intermediate accounting and under all my CPA prep courses, whether it's Becker, Sargent, Wiley, Roger, or Glein, the first thing I do is I want to make sure you know basic accounting and you know the time value of money. Those are the first things I start with. So in this session, you will notice that it's not as difficult once you understand the time value of money. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, CPA questions, as well as Excel tutorial. If you like my lectures, if you like my lessons, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people. Connect with me on Instagram. On my website, farhatlectures.com, you will find a catalog of courses and CPA resources to help you complement and supplement your studies. Your study for your CPA exam, one time in your lifetime. It's a lifetime investment. Don't shortchange yourself in time, money, and effort. It's a 20 to 30 year investment. Take it seriously. So let's take a look at this question and see how we approach the question like this on the exam. On December 31st, year one, a jet received two $10,000 notes receivable from customer in exchange for services rendered. So we are dealing with two notes. We're going to start to, let me just do the entry. We're going to have a notes receivable and credit sales revenue for the first client. We have two clients that we're going to debit, notes receivable, and we're going to credit sales revenue. On both notes, interest is calculated on the outstanding balance and an interest rate of 3% compounded annually and payable at maturity. So they make the computation easy for us. The note from heart. So we have notes receivable, one from heart. Made under customary trade is due in nine months and the note from max. So we have two notes, one from heart and one from max is due in five years. The market interest rate for similar notes on the 10,000 year one was 8%. So this is the market ongoing market rate. The compound interest rate factors are as follow. We have them here. Jet does not elect the fair value option. Okay, they don't select the fair value option and we're not giving fair value information. Otherwise, it will be easy. We report them at fair value with either unrealized gain or loss for reporting its financial asset. At what amount should these two notes receivable be reported on December 31st, year one balance sheet? Well, I'm going to start with the easy one. I'm going to start with heart. The note with heart is due in nine months. It's less than a year. It's a short period of time. Pretty straightforward. Nothing to worry about. We don't have to worry about the time value of money because we assume it's immaterial. Therefore, we debit $10,000 notes receivable, credit sales, $10,000. We're basically done with the first note. Why? Because it's less than a year. If it's less than a year, basically FASB said, don't worry about discounting to the present value because the amount is immaterial. Now, in reality, in reality, there's a little bit of interest involved with this. We should report it at a little bit of a discount, but FASB said, don't worry about that. Don't worry about that. It's less than a year. Now, for max, we have to take into account what's going to happen with max note. Here's what max notes looks like. This is today. One, two, three, four, five. Five years from now, they're going to pay us $10,000 plus they're going to pay us interest. This is how much we will receive five years from now. But we need to record this note today. We need to record the note today. I understand how much I'm going to be receiving five years from now, but today, how should I record this note? Well, we have to understand the general rule. The general rule is every time you have a future payment of money or a future receipts of money, which is, this is a future receipts of money, you record that at the present value, at the present value of those payments or receipts, whether you are dealing with the notes receivable, notes payable, leases, bonds, as well as other factors. Here we are dealing with the notes receivable. So how much are we going to be receiving five years from now? We know for sure the 10,000. In addition to the 10,000, they're going to pay me interest because I'm going to, I'm not only going to be receiving the 10,000, I'm going to be getting the interest. Therefore, I have to compute the interest. The interest is the future value of a dollar and five years, 1.159. Therefore, I'm going to take $10,000, multiply it by 1.1593, and I should be getting 11,593. So this is the amount I'm going to be receiving five years from now. That's fine and dandy. That doesn't really, that's good to know. You have to know, but what you are concerned with, how much would you report this amount today? Well, what do I do? I just told you, you would report it at the present value. It's a single payment. So you would find the present value of a dollar due in five years and the factor is 0.680. So I'm going to take 11,593, multiplied by 0.680. And this is the amount I'm going to be computing. I'm going to be recording the receivable on which is 7,883. So it's 7,883, 7,883, 7,883. Therefore, the notes is reported at 7,883 for max and for heart. Real easy 10,000, it's less than a year. So this is why it's important that you are comfortable with those factors and understanding how notes receivable work you are expecting to receive a future payment. Once again, these topics are covered in depth. So what's the difference between what I offer in a CPA prep course? I cannot compete with a CPA prep course. They have everything for you, everything ready, all the simulation, all that stuff. What I can do is I can fill what they don't, what they don't fill, such as teaching you the basics, anything that you missed that you did not, you did not take when you, when you were in college or when you took, you did not learn properly. I have all sorts of accounting courses if you go to my course catalog and all sorts of CPA resources. Check it out. Maybe you might be able to add 10 to 15 points on your CPA exam to get it behind you. Do so. Don't wait. Study hard and stay safe.