NOTE RECEIVABLES are claims supported by formal promises to pay usually in the form of notes.

They
usually represent claims arising from sale of merchandise or service in the ordinary course of business.
A NEGOTIOABLE 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. It is a written contract in which one person, known as the maker, promises to
pay another person, known as the payee, a definite sum of money.

When a promissory note matures and is not paid, it is said to be DISHONORED so theoretically the dishonored
note should be removed from the notes receivable account and transferred to accounts receivable at an
amount to include interest and other charges if any. The entry is:

ACCOUNT RECEIVABLE XX
NOTE RECEIVABLE XX
INTEREST INCOME XX

MEASUREMENT OF NOTES RECEIVABLE

INITIAL
-> Conceptually
Conceptually,shall
Notesbe Receivable
measured atshould
present
be value
measured initially at PRESENT VALUE, which is the sum
future cash flows discounted using the prevailing market rate of interest for similar notes. The prev
market rate of interest is usually the effective interest rate.

-> Short-term notes receivable are measured at FACE VALUE.

Interest-bearing long-term notes are measured at FACE VALUE, which is actually the PRESENT VALUE
-> issuance.

-> Non-interest bearing long-term notes are measured at PRESENT VALUE, which is the DISCOUNTED V
of the future cash flows using the effective interest rate.
SUBSEQUENT
->
After the initial recognition, long-term notes receivable shall be measured at amortized cost usin
effective interest method. The amortized cost is the amount at which the receivable is measured in
minus principal repayment, plus or minus the cumulative amortization of any difference between the
carrying amount and the principal maturity amount.
-> For long-term non-interest bearing notes receivable, the amortized cost is the present value plus amorti
of the discount, or the face value minus the unamortized unearned interest income.
orm of notes. They
of business.
e by one person to
e time a sum certain
maker, promises to

ically the dishonored

nts receivable at an

ALUE, which is the sum of all

similar notes. The prevailing

ly the PRESENT VALUE upon

h is the DISCOUNTED VALUE

at amortized cost using the

eceivable is measured initially
difference between the initial

resent value plus amortization

me.
Apri 1, 2021 ABC Company sold an equipment costing P100,000 with a book value of P80,000, receiving P100,000, 180-day, 1

Notes Receivable 100,000.00

Accumulated Depreciation 20,000.00
Equipment 100,000.00
Gain on Sale 20,000.00

Assuming the note was paid

Sep 28, 2021 Cash 105,000.00
Notes Receivable 100,000.00
Interest Income 5,000.00

Assuming the note was dishonored

Sep 29, 2021 Accounts Receivable 105,000.00
Notes Receivable 100,000.00
Interest Income 5,000.00

Apri 1, 2021 ABC Company sold goods and receiving P100,000, 180-day, 10% promissory note.
Notes Receivable 100,000.00
Sales 100,000.00
ceiving P100,000, 180-day, 10% promissory note.

A 29
M 31
J 30
J 31
A 31
S 28
180
Apri 1, 2021 ABC Company sold an equipment costing P1,000,000 with a book value of P800,000 and a fair value of P900,000

Case 2. P1,000,000 none interest bearing note payable in 4 equal annual payments.
The company uses outstanding balance method in amortizing the unearned interest.

Notes Receivable 1,000,000.00

Accumulated Dep'n. 200,000.00
Equipment 1,000,000.00
Gain on Sale 100,000.00
Unearned Interest Income (1M - 900T) 100,000.00
Fair Value/Proceeds 900,000.00
Less Cost 1,000,000.00
Less A/D 200,000.00 800,000.00
Gain on Sale 100,000.00

Dec 31, 2021 Unearned Interest Income 30,000.00

Interest Income 30,000.00
Outstanding Interest
Date Balance Fraction Income 3 months
1/4/2021 1,000,000.00 100/250 40,000.00
1/4/2022 750,000.00 75/250 30,000.00 10,000.00
1/4/2023 500,000.00 50/250 20,000.00 7,500.00
1/4/2024 250,000.00 25/250 10,000.00 5,000.00
2,500,000.00 100,000.00

Apr 1, 2022 Cash 250,000.00

Notes Receivable 250,000.00

Unearned Interest Income 10,000.00

Interest Income 10,000.00

Dec 31, 2022 Unearned Interest Income 22,500.00

Interest Income 22,500.00

Apr 1, 2023 Cash 250,000.00

Notes Receivable 250,000.00

Unearned Interest Income 7,500.00

Interest Income 7,500.00

Dec 31, 2023 Unearned Interest Income 15,000.00

Interest Income 15,000.00

Apri 1, 2021 ABC Company sold an equipment costing P1,000,000 with a book value of P800,000 and a fair value of P900,000

Case 2. P1,000,000 none interest bearing note payable in 4 equal annual payments.
 Using effective interest rate method of amortization
Date Installment Interest Principal Present Value
1/4/2021 900,000.00
1/4/2022 250,000.00 39,166.23 210,833.77 689,166.23
1/4/2023 250,000.00 29,991.16 220,008.84 469,157.39
1/4/2024 250,000.00 20,416.81 229,583.19 239,574.20
1/4/2025 250,000.00 10,425.80 239,574.20 -

Dec 31, 2021 Unearned Interest Income 29,374.67

Interest Income 29,374.67

Apr 1, 2022 Cash 250,000.00

Notes Receivable 250,000.00

Unearned Interest Income 9,791.56

Interest Income 9,791.56
d a fair value of P900,000 by receiving a promissory note.

Total BS presentation - 2021

9 months Int Inc for the year Current Assets
30,000.00 30,000.00 2021 Face Value 250,000.00
22,500.00 32,500.00 2022 Less Unearned Int 10,000.00
15,000.00 22,500.00 2023 Carrying Value 12/31/21 240,000.00
5,000.00 2024
Non-current Assets
Face Value 750,000.00
Less Unearned Int 60,000.00
Carrying Value 12/31/21 690,000.00

32,500.00 Carrying Value of NR 12/31/21 930,000.00

d a fair value of P900,000 by receiving a promissory note.

 900,000.00
- 250,000.00
- 250,000.00
- 250,000.00
- 250,000.00
4.352%
Date Collections
1/4/2022 250,000.00
1/4/2023 250,000.00
1/4/2024 250,000.00
1/4/2025 250,000.00
Apri 1, 2021 ABC Company sold an equipment costing P1,000,000 with a book value of P800,000 receiving a 2-yr, P1,000,000
The market rate of interest on this date for similar note of this type is 10%.

Face Value 1,000,000.00

PV of 1 at 10% for 2 periods (1.10^-2) 0.82645
Present Value = Selling Price = FV of equipment 826,446.28

Notes Receivable 1,000,000.00

Accumulated Depreciation 200,000.00
Equipment 1,000,000.00
Gain on Sale (826,446.28 - 800,000) 26,446.28
Unearned Interest Income 173,553.72

Dec 31, 2021 Unearned Interest Income (82,644.63 X 9/12) 61,983.47

Interest Income 61,983.47
Date Interest Income Carrying Value
1/4/2021 826,446.28
1/4/2022 82,644.63 909,090.91
1/4/2023 90,909.09 1,000,000.00

Apr 1, 2022 Unearned Interest Income 20,661.16

Interest Income 20,661.16

Dec 31, 2022 Unearned Interest Income 68,181.82

Interest Income 68,181.82

Apr 1, 2023 Cash 1,000,000.00

Notes Receivable 1,000,000.00

Unearned Interest Income 22,727.27

Interest Income 22,727.27
eiving a 2-yr, P1,000,000, non-interest bearing promissory note.

Installment PV annuity Factor of 1 (1 - (1+i)^-n)/i 1.73553719

Lumpsum - one-time PV of 1 (1+i)^-n 0.82644628
Periods PV Factor
- 1
1.00 0.9090909091
2.00 0.826446281
1.7355371901 PVA

BS presentation 2021
Non-current assets
Face Value 1,000,000.00
Unearned Interest Income 111,570.25
Carrying Value 12/31/21 888,429.75

Interest Income for 2022 88,842.98

BS presentation 2022
Current assets
Face Value 1,000,000.00
Unearned Interest Income 22,727.27
Carrying Value 12/31/22 977,272.73

Interest Income for 2022 88,842.98

Apri 1, 2021 ABC Company sold an equipment costing P1,000,000 with a book value of P800,000 receiving a P1,200,000, non-
in 3 equal annual payments .

The market rate interest on this date for similar note of this type is 12%.

Annual Installment (P1,200,000 / 3) 400,000.00

PVAF of 1 at 12% for 3 periods 2.40183
Present Value of the Notes = SP = Fair Value 960,732.51

Notes Receivable 1,200,000.00

Accunulated Depreciation 200,000.00
Equipment
Gain on Sale
Unearned Interest Income

Dec 31, 2021 Unearned Interest Income 86,465.93

Interest Income
Date Installment Interest Principal Carrying Value
1/4/2021 960,732.51
1/4/2022 400,000.00 115,287.90 284,712.10 676,020.41
1/4/2023 400,000.00 81,122.45 318,877.55 357,142.86
1/4/2024 400,000.00 42,857.14 357,142.86 0.00
1,200,000.00 239,267.49 960,732.51
Apr 1, 2022 Cash 400,000.00
Notes Receivable

Unearned Interest Income 28,821.98

Interest Income

Dec 31, 2022 Unearned Interest Income 60,841.84

Interest Income
eiving a P1,200,000, non-interest bearing promissory note payable

Period PVF
- 1.0000
1.00 0.8929
2.00 0.7972
3.00 0.7118
PVAF 2.4018

1,000,000.00
160,732.51
239,267.49

86,465.93 Total Current Non-current

FV 1,200,000.00 400,000.00 800,000.00
Less Unearned 152,801.57 28,821.98 123,979.59
1,047,198.43 CV 12/31/21 1,047,198.43 371,178.02 676,020.41

Current 371,178.02

Non-current 676,020.41
400,000.00

28,821.98

60,841.84
or ABC Company sold an equipment costing P1,000,000 with a book value of P800,000 receiving a
bearing promissory note payable in 3 equal annual payments of P400,000.
alue of P800,000 receiving a non-interest
Present Value of Notes = SP = Fair Value 712,000.00
Less BV 800,000.00
Loss on Sale - 88,000.00

Interest Income 2020 (712,000 X 12%) 85,440.00

CV of Note 12/31/20 797,440.00

Interest Income 2021 (797,440 X 12%) 95,692.80

893,132.80

107,175.94

1,000,308.74

Date Interest CV
1/1/2020 712,000.00
12/31/20 85,440.00 797,440.00
12/31/21 95,692.80 893,132.80
12/31/22 107,175.94 1,000,308.74

Cash received 1,000,000.00

CV 12/31/20 PV of remaining 9 payments (1,000,000 X 6.25) 6,250,000.00 2)
Sales Revenue 7,250,000.00 1)

Interest Income 2021 (6,250,000 X 8%) 500,000.00 3)

CV of Notes 12/31/21 5,750,000.00 4)

 Period PV
0 1
1 0.925926
2 0.857339
3 0.793832
4 0.73503
5 0.680583
6 0.63017
7 0.58349
8 0.540269
9 0.500249 PVFAD 7.246888 6.246888
10 0.463193 PVAF 6.710081

PVFAD (1-(1+i)^-(n-1))/I + 1 7.25

PVAF (1-(1+i)^-n)/i 6.71
7,250,000.00

(CV 12/31/20 X (1 + i) - Installment = CV 12/31/21