Illustration 2: Non-interest bearing note

-An entity manufactures and sells machinery. On January 1, 2021, the entity sold machinery costing P280,000 for
P400,000. The buyer signed a non-interest bearing note for P400,000, payable in four equal installments every
December 31. The cash sale price of the Machinery is P350,000.
Face amount of note 400,000.00 Face Amount 400000
Present value - cash sale price 350,000.00 Minus: Unearned interest income
50000
Unearned interest income 50,000.00 Present Value 350000

Cash sale price 350,000.00

Cost of machinery 280,000.00
Gross income 70,000.00
-Journal Entries
Year 2021
Note receivable 400,000.00
Sales 350,000.00
Unearned interest income 50,000.00
***to record the sale

Cash 100,000.00
Notes receivable 100,000.00 300,000.00
***to record the first installment collection

Unearned interest income 20,000.00

Interest income 20,000.00
***to record the unearned intersest income over the term of the note computed as follows:
Note Receivable Fraction Interest Income
2021 400,000.00 4/10 20,000.00
2022 300,000.00 3/10 15,000.00
2023 200,000.00 2/10 10,000.00
2024 100,000.00 1/10 5,000.00
1,000,000.00 50,000.00
Year 2022
Cash 100,000.00
Notes receivable 100,000.00
 ***to record the second installment collection

Unearned interest income 15,000.00

Interest income 15,000.00
***to record the unearned intersest income over the term (see computation above)

Year 2023
Cash 100,000.00
Notes receivable 100,000.00
***to record the third installment collection

Unearned interest income 10,000.00

Interest income 10,000.00
***to record the unearned intersest income over the term (see computation above)

Year 2024
Cash 100,000.00
Notes receivable 100,000.00
***to record the fourth installment collection

Unearned interest income 5,000.00

Interest income 5,000.00
***to record the unearned intersest income over the term (see computation above)

-Financial statement presentation

-If a statement of financial position is prepared on December 31, 2021, the current portion of the note receivable is
classified as current asset
Note receivable - current portion 100,000.00
Unearned interest income - 15,000.00
Carrying amount or amortized cost 85,000.00

Total unearned interest income 50,000.00

Realized in 2021 - 20,000.00
Balance - December 31, 2021 30,000.00
 ***Realizable in 2022 - current portion 15,000.00
Realizable beyond 2022 - non-current portion 15,000.00
Total 30,000.00
-The non-current portion of the note receivable is classified as non-current asset
Note receivable - non-current portion 200,000.00
Unearned interest income - 15,000.00
Carrying amount or amortized cost 185,000.00

Illustration 3: Non-interest bearing note (payment in series)

-On January 1, 2021, 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 non-interest bearing note for P300,000 payable in equal annual installment of P100,000 every
December 31. The market interest rate for this note is 10%. The present value of an ordinary annuity of 1 for three
periods at 10% is 2.4869.
-Computation: PV Factor=(1-(1.i)^-n)/i
a b c d
-n
1 (1+i)^ i (a-b)/c
1 0.7513 10% 2.4869
-The present value of the note is computed by multiplying the annual installment of P100,000 by the present value
factor of 2.4869 or P248,690
Face amount of note 300,000.00
Less: Present value of note (100,000 * 2.4869) 248,690.00
Unearned interest income 51,310.00

Present value of note 248,690.00

Add: Cash received-down payment 100,000.00
Sales Price 348,690.00
Less: Cost of equipment 250,000.00
Gain on sale of equipment 98,690.00
-Journal Entries using effective interest method of amortization
January 1, 2021
Cash 100,000.00
Note receivable 300,000.00
Equipment 250,000.00
 Gain on sale of equipment 98,690.00
Unearned Interest Income 51,310.00

December 31, 2021

Cash 100,000.00
Note receivable 100,000.00

Unearned interest income 24,869.00

Interest income 24,869.00
***to record the unearned intersest income over the term of the note computed as follows:
Date Annual Collection Interest Income Principal Present Value
January 1, 2021 248,690.00
December 31, 2021 100,000.00 24,869.00 75,131.00 173,559.00
December 31, 2022 100,000.00 17,355.90 82,644.10 90,914.90
December 31, 2023 100,000.00 9,091.49 90,914.90 -

December 31, 2022

Cash 100,000.00
Note receivable 100,000.00

Unearned interest income 17,355.90

Interest income 17,355.90

December 31, 2023

Cash 100,000.00
Note receivable 100,000.00

Unearned interest income 9,091.49

Interest income 9,091.49