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Note Receivable Part 1

INTERMEDIATE ACCOUNTING 1

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amp510152025
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9 views

Note Receivable Part 1

INTERMEDIATE ACCOUNTING 1

Uploaded by

amp510152025
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INTERMEDIATE ACCOUNTING 1

NOTES RECEIVABLE

NOTES RECEIVABLE
-Is a claim supported by a formal promise to pay a certain amount of money at a specific future date usually in the
form of a promissory note.

TYPES OF PROMISSORY NOTE


INTEREST BEARING
-Have a stated interest rate, i.e. the contracted interest rate stated in a promissory note.
-Other terms include nominal rate, coupon rate, and face rate.
NON INTEREST BEARING
-Do not have stated interest rate because they include the interest element as part of the face amount.
-The face amount of a non interest bearing note represents an unspecified principal and unspecified interest.
-Present value computation is needed to separate the interest element from the principal element.

TRADE AND NON-TRADE NOTES RECEIVABLES


TRADE RECEIVABLES
- Notes receivable obtained from the sale of goods and services in the ordinary course of business
NON TRADE RECEIVABLES
- Notes from other sources i.e. notes from loan of employees, affiliates, sale of property etc.

DISHONORED NOTES
-When a promissory note matures and is not paid, it is said to be dishonored.
-Theoretically, dishonored notes receivable account should be removed from the notes receivable account and
transferred to accounts receivable.
-The amount debited to accounts receivable should include the face amount, interest and other charges.

INITIAL MEASUREMENT OF NOTES RECEIVABLE


-Conceptually, notes receivable shall be measured initially at present value.
-The present value is the sum of all future cash flows discounted using the prevailing market rate of interest for
similar notes.
-The prevailing market rate of interest is actually the effective interest rate.
-However, short-term notes receivable shall be measured at face amount.
-Cash flows relating to short-term notes receivable are not discounted because the effect of discounting is usually
not material.
-The initial measurement of long-term notes will depend on whether the notes are interest-bearing or non
interest bearing.
-Interest bearing Notes Receivable
-Interest bearing long term notes are measured at face amount which is actually the present value upon
issuance.
-Non-interest bearing Notes Receivable
-Non-interest bearing long term notes are measured at present value which is the 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 is simply a case of the interest being included in the face amount rather
than being stated as a separate rate.

SUBSEQUENT MEASUREMENT
-Subsequent to initial recognition, long-term notes receivable shall be measured at amortized cost using the
effective interest method. The amortized cost measurement is in accordance with PFRS 9, paragraph 5.2.1.
-The amortized cost is the amount at which the note receivable is measured initially:
a. minus principal repayment
b. plus or minus cumulative amortization of any difference between the initial carrying amount and the
principal maturity amount
c. minus reduction for impairment or uncollectibility
-For long-term non-interest bearing notes receivable, the amortized cost is the present value plus amortization
of discount, or the face amount minus the unamortized unearned interest income.

ILLUSTRATION ON INTEREST BEARING NOTE RECEIVABLE


Illustration 1: Interest Bearing Note
-An entity owned a tract of land costing P800,000 and sold the land for P1,000,000. The entity received a
3-year note for P1,000,000 plus interest of 12% compounded annually.
-The selling price of P1,000,000 is reasonably assumed to be the present value of the note because the note is
interest bearing.
-Journal entries
First year
Note Receivable 1,000,000.00
Land 800,000.00
Gain on Sale of Land 200,000.00

Accrued Interest Receivable 120,000.00


Interest Income 120,000.00
***(12%*1,000,000)
Second Year
Accrued Interest Receivable 134,400.00
Interest Income 134,400.00
***Face Amount 1,000,000.00
Interest Income for first year 120,000.00
Total 1,120,000.00
Interest rate 12%
Interest Income for second year 134,400.00
Third year
Cash 1,404,928.00
Note Receivable 1,000,000.00
Accrued Interest Receivable 120,000.00
Accrued Interest Receivable 134,400.00
Interest Income 150,528.00
***Face Amount 1,000,000.00
Interest Income for first year 120,000.00
Interest Income for second year 134,400.00
Total 1,254,400.00
Interest rate 12%
Interest Income for third year 150,528.00
Cash received (1,254,400 + 150,528) 1,404,928.00

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