Face value, also known as par value, refers to the nominal or stated value of a financial instrument, such as a bond or a note. It represents the amount that the issuer of the instrument promises to pay back to the holder at maturity or upon redemption.
5 Must Know Facts For Your Next Test
Face value is an important concept in the context of notes receivable and accounts receivable, as it represents the amount the debtor promises to pay the creditor.
When recording short-term notes payable, the face value of the note is the amount the issuer of the note promises to pay the holder at maturity.
The face value of a long-term liability, such as a bond, is the amount the issuer promises to pay the bondholder at the bond's maturity date.
The effective-interest method of amortizing long-term liabilities uses the face value of the liability to calculate the periodic interest expense.
When preparing journal entries to reflect the life cycle of a bond, the face value of the bond is the amount recorded as the liability on the issuer's books.
Review Questions
Explain how the concept of face value differs between notes receivable and accounts receivable.
The face value of a note receivable represents the amount the debtor promises to pay the creditor at the maturity of the note. This is different from accounts receivable, where the face value represents the total amount owed by the customer for goods or services provided. Notes receivable involve a formal written promise to pay, while accounts receivable do not.
Describe how the face value of a short-term note payable is used in the journal entries to record the note.
When recording a short-term note payable, the face value of the note is the amount that the issuer of the note promises to pay the holder at the maturity of the note. This face value is the amount recorded as a liability on the issuer's books. The journal entries to record the issuance and repayment of the short-term note payable will use the face value of the note.
Analyze the role of face value in the pricing and amortization of long-term liabilities, such as bonds.
The face value of a long-term liability, such as a bond, is the amount the issuer promises to pay the holder at the bond's maturity date. This face value is used in determining the initial price or market value of the bond, as well as in the effective-interest method of amortizing the bond's discount or premium over its life. The face value is a critical component in the accounting for the life cycle of bonds, from issuance to maturity.
Related terms
Maturity Value: The amount that the issuer of a financial instrument, such as a bond or note, promises to pay the holder at the instrument's maturity date.
Coupon Rate: The stated interest rate on a bond or note, which determines the periodic interest payments made to the holder.