Module 6 Notes Receivables

Subject: Financial Analysis and Reporting
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1 Compilation of Instructional Materials

Module 6: Notes Receivable
Intended Learning Outcomes (ILO)
By the end of the module, the students are expected to:
1. To understand the concept and nature of notes receivable

2. To know the initial and subsequent measurement of notes receivable
3. To know the accounting for interest-bearing note receivable
4. To know the accounting for noninterest-bearing note receivable
Lecture Proper and Discussion
What are Notes Receivable?
Notes receivable are a balance sheet item, that records the value of promissory notes that a business
is owed and should receive payment for. A written promissory note gives the holder, or bearer, the
right to receive the amount outlined in the legal agreement. Promissory notes are a written promise to
pay cash to another party on or before a specified future date.
If the note receivable is due within a year, then it is treated as a current asset on the balance sheet. If
it is not due until a date that is more than one year in the future, then it is treated as a non-current
asset on the balance sheet.
Often, a business will allow customers to convert their overdue accounts (the business’ accounts
receivable) into notes receivable. By doing so, the debtor typically benefits by having more time to
pay.
Summary
• A note receivable is also known as a promissory note.
• When the note is due within less than a year, it is considered a current asset on the balance
sheet of the company the note is owed to. If its due date is more than a year in the future, it is
considered a non-current asset.
• The interest income on notes receivable is recognized on the income statement. Therefore,
when payment is made on a note receivable, both the balance sheet and the income statement are
affected.
Key Components of Notes Receivable
Here are the key components of notes receivable:
• Principal value: The face value of the note
• Maker: The person who makes the note and therefore promises to pay the note’s holder. To a
maker, the note is classified as a note payable.
• Payee: The person who holds the note and therefore is due to receive payment from the
maker. To a payee, the note is classified as a note receivable
• Stated interest: A note receivable generally includes a predetermined interest rate; the maker
of the note is obligated to pay the interest amount due, in addition to the principal amount, at the
same time that they pay the principal amount.
• Timeframe: The length of time during which the note is to be repaid. Notes receivable are not
usually subject to prepayment penalties, so the maker of the note is free to pay off the note on or
before the note’s stated due, or maturity, date.
Example of Notes Receivable
Company A sells machinery to Company B for $300,000, with payment due within 30 days. After 45
days of nonpayment by Company B, both parties agree that Company B will issue a note payable for
the principal amount of $300,000, at an interest rate of 10%, and with a payment of $100,000 plus
interest due at the end of each month for the next three months. Alternatively, the note may state that
the total amount of interest due is to be paid along with the third and final principal payment of
$100,000.
In this example, Company A records a notes receivable entry on its balance sheet, while Company B
records a notes payable entry on its balance sheet. The principal value is $300,000, $100,000 of
which is to be paid monthly. In addition, the agreed upon interest rate on the note is 10%.
Example of Journal Entries for Notes Receivable
Still using the example delineated above, with companies A and B:
A note receivable of $300,000, due in the next 3 months, with payments of $100,000 at the end of
each month, and an interest rate of 10%, is recorded for Company A.
The proper journal entries for Company A are as follows:

At the end of the first month, Company B pays $100,000 as well as an interest payment = $2,465.75
(calculated as $300,000 x 10% x 30 / 365 days = $2,465.75).
At the end of the second month, Company B pays $100,000, along with interest of $200,000 x 10% x
30 / 365 days = $1,643.84. Note that the amount of interest is lower because the outstanding
principal amount is now only $200,000 ($300,000 – $100,000), having been reduced by the previous
month’s payment.

At the end of the third and final month, Company B pays the remaining principal of $100,000, as well
as the interest of $100,000 x 10% x 30 / 365 days = $821.92
At the end of the three months, the note, with interest, is completely paid off.
Notes Receivable vs Notes Payable

It is not unusual for a company to have both a Notes Receivable and a Notes Payable account on
their statement of financial position. Notes Payable is a liability as it records the value a business
owes in promissory notes. Notes Receivable are an asset as they record the value that a business is
owed in promissory notes. A closely related topic is that of accounts receivable vs. accounts payable.
Suggested Teaching Activities (TAs)
• https://youtu.be/Yz6HWea2lVY
• https://youtu.be/hFbZM1uvmqU
Assessment Tasks / Output (ATOs)
1. The amount of the promissory note plus the interest earned on the due date is called the:
a) Realizable value
b) Face value
c) Net realizable value
d) Maturity value
Answer: D
2. In reference to a promissory note, another word(s) for “discount” is:
a) Fair Value
b) Interest
c) To buy for more than face value
d) Maturity
Answer: B
3. A note receivable is recorded at its
a) Face Value
b) Fair market value
c) Present value
d) Maturity value
Answer: A
4. On July 17, 2001, received a $12,000, 90-day, 10% note on account from Adams Co. Determine:
a) Due date for the note

b) Interest earned during the term of the note
c) Maturity value of the note Prepare journal entries whether:
d) The note is honored on the maturity date
e) The note is dishonored on the maturity date

5. Journalize the adjusting entry for accrued interest on December 31 for the following outstanding
notes receivable. Journalize the receipt of the amount due on the due date for each note.
a) $24,000, 60-day, 10% note dated December 1.

b) $12,000, 90-day, 15% note dated October 22.
Readings and Other References
1. Intermediate accounting volume 1; Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix
2. https://youtu.be/Yz6HWea2lVY
3. https://youtu.be/hFbZM1uvmqU

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Subject: Financial Analysis and Reporting

1 Compilation of Instructional Materials

Intended Learning Outcomes (ILO)

By the end of the module, the students are expected to:

1. To understand the concept and nature of notes receivable

Lecture Proper and Discussion

What are Notes Receivable?

• A note receivable is also known as a promissory note.

Key Components of Notes Receivable

Here are the key components of notes receivable:

• Principal value: The face value of the note

Example of Notes Receivable

Example of Journal Entries for Notes Receivable

Still using the example delineated above, with companies A and B:

The proper journal entries for Company A are as follows:

3 Compilation of Instructional Materials

4 Compilation of Instructional Materials

Notes Receivable vs Notes Payable

5 Compilation of Instructional Materials

Suggested Teaching Activities (TAs)

Assessment Tasks / Output (ATOs)

2. In reference to a promissory note, another word(s) for “discount” is:

3. A note receivable is recorded at its

a) Due date for the note

6 Compilation of Instructional Materials

a) $24,000, 60-day, 10% note dated December 1.

Readings and Other References

7 Compilation of Instructional Materials

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