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 254,400.00
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

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
Present value - cash sale price 350,000.00
Unearned interest income 50,000.00
 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
***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 first 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 first 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 first 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 2021 - 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 not 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 (1-(1.i)^-n)/i
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

Illustration 4: Non-interest bearing note (Payment in lumpsum)

-On January 1, 2021, an entity sold an equipment costing P600,000 with accumulated depreciation of P250,000. The entity
received as consideration P100,000 cash and a P400,000 non-interest bearing note due on January 1, 2024. The prevailing rate
of interest for a note of this type is 10%. The present value of 1 at 10% for 3 years is 0.7513.
-Computation: PV Factor=(1 + i)^-n
=(1+10%)^-3 = 0.7513
-The present value of the note is computed by multiplying the payment in lumpsum of P400,000 by the present value
factor of .7513 or P300,520
Face amount of note 400,000.00
Less: Present value of note (400,000 * 0.7513) 300,520.00
Unearned interest income 99,480.00
 Present Value of Note receivable 300,520.00
Add: Cash received 100,000.00
Sales Price of equipment 400,520.00
Less: Carrying amount of equipment (600,000-250,000) 350,000.00
Gain on sale of equipment 50,520.00

-Journal Entries using effective interest method of amortization

January 1, 2021
Cash 100,000.00
Note receivable 400,000.00
Accumulated depreciation 250,000.00
Equipment 600,000.00
Gain on sale of equipment 50,520.00
Unearned Interest Income 99,480.00

December 31, 2021

Unearned interest income 30,052.00
Interest income 30,052.00
***to record the unearned intersest income over the term of the note computed as follows:
Date Interest Income Unearned Int. Income Present Value
January 1, 2021 99,480.00 300,520.00
December 31, 2021 30,052.00 69,428.00 330,572.00
December 31, 2022 33,057.20 36,370.80 363,629.20
December 31, 2023 36,370.80 - 400,000.00

December 31, 2022

Unearned interest income 33,057.20
Interest income 33,057.20

December 31, 2023

Unearned interest income 36,370.80
Interest income 36,370.80
January 1, 2021
Cash 400,000.00
Note receivable 400,000.00