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Notes Receivable: Valix, C. T. Et Al. Intermediate Accounting Volume 1. (2019) - Manila: GIC Enterprises & Co. Inc

Notes receivable represent formal promises to pay, usually in the form of promissory notes. A promissory note is a written contract where the maker promises to pay the payee a definite sum of money, either on demand or at a future date. Notes receivable are initially measured at present value, with short-term notes measured at face value due to the immaterial effect of discounting. Subsequently, long-term notes are measured at amortized cost using the effective interest method, while short-term notes remain at face value. When notes mature and are unpaid, they are considered dishonored and represent an ordinary claim against the maker.

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330 views9 pages

Notes Receivable: Valix, C. T. Et Al. Intermediate Accounting Volume 1. (2019) - Manila: GIC Enterprises & Co. Inc

Notes receivable represent formal promises to pay, usually in the form of promissory notes. A promissory note is a written contract where the maker promises to pay the payee a definite sum of money, either on demand or at a future date. Notes receivable are initially measured at present value, with short-term notes measured at face value due to the immaterial effect of discounting. Subsequently, long-term notes are measured at amortized cost using the effective interest method, while short-term notes remain at face value. When notes mature and are unpaid, they are considered dishonored and represent an ordinary claim against the maker.

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Shergie Gozum
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NOTES RECEIVABLE

Valix, C. T. et al. Intermediate Accounting Volume 1. (2019). Manila: GIC


Enterprises & Co.; Inc.
Notes Receivable
 Claims supported by formal promises to pay usually in the form of notes.
 A negotiable promissory note is an unconditional promise in writing made
by one person to another, signed by the maker engaging to pay on
demand or at a fixed determinable future time a sum certain in money to
order or to bearer.
Notes Receivable
 A promissory note is a written contract in which one
person, known as the maker, promises to pay another
person, known as thee payee, a definite sum of money.
 The note may be payable on demand or at a definite
future date.
 Standing alone, the term notes receivable represents
only claims arising from sale of merchandise or service in
the ordinary course of business.
 Notes received from officers, employees, shareholders
and affiliates shall be designated separately.
Dishonored Notes

 When the note matures and is not paid, it is said to be dishonored.

To record dishonored note:


Accounts Receivable xxx
Notes Receivable xxx
Interest Income xxx
 The overdue note has lost part of its status as negotiable instrument and
really represents only an ordinary claim against the maker.
**A negotiable instrument is a document guaranteeing the payment of a specific
amount of money, either on demand, or at a set time, with the payer usually
named on the document**
Initial Measurement of Notes
Receivable
 Conceptually, N/R shall be measured initially at Present Value (PV).

PV = sum of all future cash flows discounted using the prevailing


market rate of interest for similar notes

Prevailing Market Rate of Interest = Effective Interest Rate

 Short-term N/R shall be measured at Face Value (FV)


 Cash flows relating to short term notes receivable are not discounted
because the effect of discounting is usually not material.
Initial Measurement: Long-Term N/R
Interest Bearing Non-Interest Bearing

FV = PV upon issuance PV = Discounted value of


future cash flows using the
effective interest rate

The term “non-interest bearing” is a misnomer because all notes implicitly contain
interest. It means that the interest is being included in the face amount rather than
being stated as a separate rate.
Subsequent Measurement
(PFRS 9, par. 5.2.1)

 Subsequent to initial recognition, long-term notes


receivable shall be measured at amortized cost using
the effective interest method.
Amortized Cost
Amount at which N/R is measured initially
― Principal payment
± Cumulative amortization of any difference between the initial
carrying amount and the principal maturity amount
― Reduction for impairment or uncollectibility
= Amortized cost

 For long-term non-interest bearing N/R, the amortized cost is ::

Present Value Face Value


+ Discount Amortization ― Unamortized Unearned
Interest Income
= Amortized cost
= Amortized cost
End of Chapter

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