Multiple Choice
If you borrow \$40 from a friend and promise to pay it back in one month, what type of receivable does your friend have?
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7. Receivables and Investments
Types of Receivables
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Where is a note receivable reported in the balance sheet?
A
As an asset, either current or noncurrent depending on its maturity date
B
As a contra-asset account
C
As a liability, since it represents an obligation to pay
D
As part of shareholders' equity
Verified step by step guidance1
Understand the nature of a note receivable: A note receivable is a financial asset that represents a written promise by another party to pay a specific amount of money at a future date.
Determine the classification of the note receivable: Notes receivable are classified as assets because they represent amounts owed to the company, which are expected to provide future economic benefits.
Assess the maturity date of the note receivable: If the note receivable is expected to be collected within one year, it is classified as a current asset. If the maturity date is beyond one year, it is classified as a noncurrent asset.
Eliminate incorrect classifications: A note receivable is not a contra-asset account (which reduces the value of an asset), nor is it a liability (which represents obligations to pay), nor is it part of shareholders' equity (which represents ownership interest).
Conclude the reporting location: Based on the maturity date, the note receivable is reported in the balance sheet as either a current asset or a noncurrent asset.
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