Notes

Receivable
Notes Receivables
• Notes receivables is a claim supported by a formal promise to pay a
certain sum of money at a specific future date usually in the form of a
promissory note.
• 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 fixed determinable future time a sum certain in
money to order or to bearer.
Dishonored Notes
Dishonored notes receivable should be removed from the notes
receivable account and transferred to accounts receivable.
Journal Entry:
Accounts Receivable xx
Notes Receivable xx
Note: The amount should include face amount, interest and other
charges.
Summary of Measurements

Type of Receivables Initial Measurement Subsequent Measurement

1. Short term-interest bearing Face Value

2. Long term-interest bearing w/

reasonable rate
Face Value
Amortized
cost
3. Long term-interest bearing w/ Present Value
unreasonable rate
4. Long term- non-interest Present Value
bearing
• Notes with unreasonable rate bears an interest
which is not equal to the market rate of interest.
• The fair value of the receivable at initial
recognition may be measured in relation to the
cash price equivalent of the noncash asset given
up in exchange for the receivable. In such case,
the subsequent measurement of the receivable
is at amortized cost.
• For long term noninterest-bearing note
receivable, the amortized cost is the present
Consideration in
value plus amortization of discount or minus
amortization premium or face value less the measuring
unamortized unearned interest income
receivables
Solution:
1ST YEAR:
Note Receivable 1,000,000
Land 800,000
Gain on sale 200,000

Accrued interest receivable 120,000

Interest income 120,000 An entity owned a tract of land costing P800,00 and
sold the land for P1,000,000.
Face Value 1,000,000
Accrued interest 120,000 The entity received a 3-year note for P1,000,000
Carrying amount 1,120,000 plus interest of 12% compounded annually.

Illustration
Solution:
2nd YEAR:
Face Value 1,000,000
Accrued interest 120,000
Carrying amount 1,120,000

Accrued interest receivable 134,400

Interest income 134,400

Face Value 1,000,000 An entity owned a tract of land costing P800,00 and
Accrued interest 120,000 sold the land for P1,000,000.
Accrued interest 134,400
Carrying amount 1,254,400 The entity received a 3-year note for P1,000,000
plus interest of 12% compounded annually.

Illustration
Solution:
3rd YEAR:

Face Value 1,000,000

Accrued interest 120,000
Accrued interest 134,400
Carrying amount 1,254,400

Cash ???
Note Receivable 1,000,000
Accrued interest ?? An entity owned a tract of land costing P800,00 and
Interest Income ?? sold the land for P1,000,000.
The entity received a 3-year note for P1,000,000
plus interest of 12% compounded annually.

Illustration
Solution:
3rd YEAR:

Face Value 1,000,000

Accrued interest 120,000
Accrued interest 134,400
Carrying amount 1,254,400

Cash 1,404,928
Note Receivable 1,000,000
Accrued interest 254,400 An entity owned a tract of land costing P800,00 and
Interest Income 150,528 sold the land for P1,000,000.

Carrying Amount 1,254,000 The entity received a 3-year note for P1,000,000
Interest Income (1,254,000x12%) 150,528 plus interest of 12% compounded annually.
Total Cash 1,404,928
Illustration
An entity manufactures and sells machinery. On
January 1, 2020, the entity sold machinery
costing P280,000 for P400,000.
The buyer signed a noninterest bearing note for
P400,000, payable in four equal installments
every December 1.
The cash sale price of the machinery is
P350,000

Illustration
An entity manufactures and sells machinery. On
January 1, 2020, the entity sold machinery Solution:
costing P280,000 for P400,000. Face value of note 400,000
Present value 350,000
The buyer signed a noninterest bearing note for Unearned interest income 50,000
P400,000, payable in four equal installments
every December 1. Cash sale price 350,000
Cost of machinery 280,000
The cash sale price of the machinery is Gross income 70,000
P350,000

Illustration
 Solution:
Journal Entry 2020
Notes receivable 400,000
An entity manufactures and sells machinery. On Sales 350,000
Unearned interest income 50,000
January 1, 2020, the entity sold machinery to record the sale on January 1
costing P280,000 for P400,000.
Cash 100,000
The buyer signed a noninterest bearing note for Notes receivable 100,000
P400,000, payable in four equal installments to record the first payment on December 1.
every December 1.
Unearned interest income 20,000
The cash sale price of the machinery is Interest income 20,000
P350,000 to recognized the unearned interest income

Illustration
Unearned interest income

Year Note receivable Fraction Interest income

2020 400,000 4/10 20,000

2021 300,000 3/10 15,000

2022 200,000 2/10 10,000

2023 100,000 1/10 5,000

Total 1,000,000 50,000

 Current asset and Non-current asset

Current asset
Total unearned interest income 50,000
Realized interest (20,000)
Unearned interest to be recognized 30,000

Note receivable for 2021 100,000

Unearned interest income (15,000)
Carrying amount or amortized cost ???????
 Current asset and Non-current asset

Current asset Non-current asset

Total unearned interest income 50,000 Total unearned interest income 50,000
Realized interest (20,000) Realized interest (20,000)
Unearned interest to be recognized 30,000 Unearned interest to be recognized 30,000

Note receivable for 2021 100,000 Note receivable for 2021 ???????
Unearned interest income (15,000) Unearned interest income (15,000)
Carrying amount or amortized cost 85,000 Carrying amount or amortized cost ???????
 Current asset and Non-current asset

Current asset Non-current asset

Total unearned interest income 50,000 Total unearned interest income 50,000
Realized interest (20,000) Realized interest (20,000)
Unearned interest to be recognized 30,000 Unearned interest to be recognized 30,000

Note receivable for 2021 100,000 Note receivable for 2021 200,000
Unearned interest income (15,000) Unearned interest income (15,000)
Carrying amount or amortized cost 85,000 Carrying amount or amortized cost 185,000
Time value of money
• PV of 1 is used when the cash flow is lump sum or when the cash
flows are non-uniform
• PV of ordinary annuity 1 is used when the cash flows are in
installments and the first installment does not begin immediately.
• PV of an annuity due of 1 is used when the cash flows are in
installments and the first installments does begin immediately.
Illustration
On January 1, 2020, an entity sold an equipment with a cost of
P250,000 for P400,000.
The buyer paid a down of P100,000 and signed a noninterest
bearing note for P300,000 payable in equal annual installment of
P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
PV of ordinary annuity 1 is ????
PV of an annuity due of 1 is ????
Illustration
On January 1, 2020, an entity sold an equipment with a cost of
P250,000 for P400,000.
The buyer paid a down of P100,000 and signed a noninterest
bearing note for P300,000 payable in equal annual installment of
P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
PV of ordinary annuity 1 is 2.4869
PV of an annuity due of 1 is 2.7355
Solution
Face value 300,000
Present value(100,000 x 2.4869) 248,690
Unearned interest income 51,310
PV of Note 248,690
Cash Received 100,000
Sale Price 348,690
Sale Price 348,000
Cost of Equipment 250,000
Gain on sale of equipment 98,690
Amortization
ANNUAL
DATE COLLECTION INTEREST EARNED PRINCIPAL CARRYING AMOUNT

01/01/2020 248,690
12/31/2020 100,000 24,869 75,131 173,449
12/31/2021 100,000 17,356 82,644 90,915
12/31/2022 100,000 9,085 90,915 -

NOTE: If the ICV>Face Value = Premium

if the ICV< Face Value = Discount

Interest Treatment ---- Premium = less the interest to carrying amount

---- Discount = add the interest to carrying amount
Journal entries
• To record the sale of equipment • To record the interest income for 2020
Cash 100,000 Unearned interest 24,869
Note receivable 300,000 interest income 24,869
Equipment 250,000
Gain on sale 98,690
Unearned interest 51,310
• to record the first installment collection
Cash 100,000
Note Receivable 100,000
 Gullible Company is a dealer in equipment. On December 31,
2020, the entity sold an equipment in exchange for noninterest
bearing note requiring five annual installments of P500,000. The
Illustration first payment was made on December 31, 2021.
The market interest for similar note was 8%.

Requirement:
1. Determine the carrying amount of the note on December 31,
2021.
2. Determine the interest income for 2022.
3. Prepare journal entries for 2020 and 2021.
 Solution
Date Collection Interest income Principal Carrying amount

12/31/2020 1,995,000

12/31/2021 500,000 159,600 340,400 1,654,600

12/31/2022 500,000 132,368 367,632 1,286,986

12/31/2023 500,000 102,967 397,043 889,925

12/31/2024 500,000 71,194 428,806 461,119

12/31/2025 500,000 38,881 461,119 0

Journal entries for 2020

Notes receivable 2,500,000

Sales 1,995,000
Unearned interest income 505,000

Cash 500,000
Notes receivable 500,000

Unearned interest income 159,600

Interest income 159,600
Thank you