(Intermediate Accounting 1A)
LECTURE AID
2020
ZEUS VERNON B. MILLAN
Chapter 5 NOTES RECEIVABLE
Learning Objectives
• State the initial and subsequent
measurements of notes receivable.
• Compute for present value factors and
apply them properly.
• Prepare amortization tables.
• Compute for the effective interest rate.
INTERMEDIATE ACCTG 1A (by:
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Note receivables
• Notes receivable 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.
INTERMEDIATE ACCTG 1A (by:
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Initial measurement
• Receivables are initially recognized at fair value plus
transaction costs.
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Summary of Measurements
Type of receivable Initial measurement Subsequent
measurement
1. Short-term Face amount/ Present Recoverable historical
value/ Transaction price cost/Amortized
(for trade receivables) cost/PFRS 15
2. Long-term Face amount Recoverable historical
cost
3. Long-term w/ zero Present value Amortized cost
interest
4. Long-term w/ Present value Amortized cost
unreasonable 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.
INTERMEDIATE ACCTG 1A (by:
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Time Value of Money
• FV of ₱1 vs. PV of ₱1
- The FV of ₱1 and PV of ₱1 are opposites.
- The FV of ₱1 answers the question “If I invest ₱100,000 today at
10% interest, how much money do I have in three-years’ time?”
- FV of ₱1 = (1 + i)n = (1 + 10%)3 = 1.331
- Answer: (₱100,000 x 1.331 ) = ₱133,100
or (₱100,000 x 110% x 110% x 110%) = ₱133,100
- The PV of ₱1 answers the question “If I want to have ₱133,100 in
three-years’ time, how much money do I have to invest today (at
10% interest)?
- PV of ₱1 = (1 + i)-n = (1 + 10%)-3 = 0.751315
- Answer: (₱133,100 x 0.751315 ) = ₱100,000
PV of ₱1
• In the second example, the ₱133,100 to be received in 3-years’ time
includes an unspecified principal and unspecified interest.
These elements are separated through present value computations.
₱100,000
principal
PV
1₱133,100
computation ₱33,100
unearned interest
Therefore, assuming the ₱133,100 is a receivable, it should be
recorded today only at ₱100,000 (the present value) because the
₱33,100 is unearned interest. The interest will be recorded only when
it is earned, i.e., through passage of time.
INTERMEDIATE ACCTG 1A (by:
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Time value of money (continuation)
• PV of ₱1 is used when the cash flow is lump sum or when cash flows
are non-uniform. PV of ₱1 = (1 + i)-n
• 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 installment begins immediately.
INTERMEDIATE ACCTG 1A (by:
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Effective Interest Method
• PV of ₱1 amortization table
Date Interest income Unearned interest Present value
(a) = (c) x EIR (b) = previous bal. - (a) (c) = previous balance + (a)
1/1/x1
12/31/x1
INTERMEDIATE ACCTG 1A (by:
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Effective Interest Method
• PV of annuity amortization table
Interest Present
Date Collections income Amortization value
(d) = prev. bal.
(a) (b) = (d) x EIR (c) = (a) - (b) - (c)
1/1/x1
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APPLICATION OF CONCEPTS
PROBLEM 6: FOR CLASSROOM DISCUSSION
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OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
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Feasible Company sold to another entity a tract of land costing P5M for
P7M on Jan. 1, 2016. The buyer paid P1M down and signed a 2 year
promissory note for the remainder of the purchase price plus 12%
interest compounded annually. The note matures on January 1, 2018.
Prepare journal entries for 2016, 2017 and 2018.
INTERMEDIATE ACCTG 1A (by:
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Bygone Company manufacturers and sells computers. On Jan. 1, 2016,
the entity sold a computer costing P400,000 for P600,000. The buyer
signed a noninterest bearing note for P600,000 payable in three equal
installments every December 31. The cash selling price of the computer
is P540,000.
Prepare journal entries for the current year.
INTERMEDIATE ACCTG 1A (by:
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Innovative Company manufacturers and sells electrical generators. On
Jan. 1, 2016, the entity sold an electrical generator costing P700,000
for P1M. The buyer paid P100,000 down and signed a P900,000
noninterest bearing note payable in three equal installment every Dec.
31.
The prevailing interest rate for a note of this type is 12%. The present
value of an ordinary annuity of 1 for three periods is 2.4018.
Prepare journal entries for the current year.
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On June 30, 2016, Green Company accepted a customer’s P2,500,000 noninterest-
bearing six-month note in a sale transaction. The product sold normally sells for
P2,300,000.
What amount should be reported as interest revenue for the year end December 31,
2016?
a. 200,000
b. 100,000
c. 250,000
d. 0
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END
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