NOTES

RECEIVABLE
HELLO!
RYAN A. BAGATUA
BSA-4
Misamis University

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 What is a
NOTES
RECEIVABLE?
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“ Notes receivable are
claims supported by
formal promises to pay
usually in the form of
notes.
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“
▰ 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 a fixed determinable future time
a sum certain in money to order or to
bearer.
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DISHONORED
NOTES
Notes

“Matures and is not paid.”

Accounts Receivable xx
Notes Receivable xx
Interest Income xx
Initial
measurement
of Notes
Receivable 11
Initial measurement of notes
receivable:

Face Value Present Value

▻ Present value upon ▻ The discounted value of
issuance the future cash flows
using the effective
interest method.

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Initial measurement of notes
receivable:

Face Value Present Value

▻ Short-term Notes ▻ Long-term Noninterest
Receivable Bearing Notes
▻ Long-term Interest Receivable
Bearing Notes
Receivable

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Subsequent
measurement
of Notes
Receivable 14
 Long-term Notes Receivable

▰ Measured at amortized cost using the effective interest method.

▰ The "amortized cost" is the amount at which the note receivable
is measured initially minus principal repayment. Plus or minus
the cumulative amortization of any difference between the
initial carrying amount and the principal maturity amount minus
reduction for impairment or uncollectibility.

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 Long-term Notes Receivable

For long term noninterest bearing notes receivable:

The amortized cost is the present value plus amortization of the

discount, or the face value minus unamortized unearned interest
income

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Illustrations

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 Illustration - 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.

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 Illustration - Interest bearing note

▰  Journal entries - First year:

▻ Note receivable 1,000,000
Land 800,000
Gain on sale of land 200,000
▻ Accrued interest receivable 120,000
Interest income 120,000
(12% x 1,000,000)
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 Illustration - Interest bearing note

▰  Journal entries - Second year:

▰ Accrued interest receivable 134,400
Interest income 134,400
Face value 1,000,000
Interest accrued for first year 120,000
Total 1,120,000

Interest for second year ( 12% x 1,120,000) 134,400

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 Illustration - Interest bearing note
▰  Journal entries - Third year:
▻ Face value 1,000,000
Interest accrued:
First year 120,000
Second year 134,400 254,400
Total 1,254,400
Interest for third year (12% x 1,254,400) 150,528
Cash received 1,404,928 21
 Illustration - Interest bearing note

▰  Journal entries - Third year:

▻ Cash 1,404,928
Note receivable 1,000,000
Accrued interest receivable 254,400
Interest income 150,528

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 Illustration 1- Noninterest bearing note
▰ An entity manufactures and sells machinery. On January 1,
2013, the entity sold machinery costing P280,000 for P400,000.

▰ The buyer signed a noninterest bearing note for P400,000,

payable in four equal instalments every December 31. The cash
sale price of the machinery is P350,000.

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Illustration 1- Noninterest bearing note
▻ Face value of note 400,000
Present value-cash sale price 350,000
Unearned interest income 50,000

▻ Cash sale price 350,000

Cost of machinery 280,000
Gross income 70,000
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 Illustration 1- Noninterest bearing note
▰ Journal entries for 2013
▻ To record the sale:

Note receivable 400,000

Sales 350,000
Unearned interest income 50,000

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 Illustration 1- Noninterest bearing note
▰ To record the first installment collection:

▻ Cash 100,000
Note receivable 100,000

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 Illustration 1- Noninterest bearing note
(a) (b) (c)
Note receivable Fraction Interest Income
▰ 2013 400,0000 4/10 20,000
▰ 2014 300,000 3/10 15,000
▰ 2015 200,000 2/10 10,000
▰ 2016 100,000 1/10 5,000
1,000,000 50,000

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 Illustration 1- Noninterest bearing note
▰ To recognize the unearned interest as income over the term of
the note:
▻ Unearned interest income 20,000
Interest income 20,000

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 Illustration 1- Noninterest bearing note
▰ If a statement of financial position is prepared on December 31,
2013, the current portion of the note receivable is classified as
current asset.

▻ Note receivable-current portion 100,000

Less: Unearned interest income (15,000)
Carrying amount or amortized cost 85,000

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 Illustration 1- Noninterest bearing note
▰ The noncurrent portion of the note receivable is classified as noncurrent
asset.

▻ Note receivable -noncurrent portion 200,000

Less: Unearned interest income 15,000
Carrying amount or amortized cost 185,000

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 Illustration 1- Noninterest bearing note
▰ If a statement of financial position is prepared on December 31,
2013, the current portion of the note receivable is classified as
current asset.

▻ Total unearned interest income 50,000

Realized in Dec. 31, 2013 (20,000)
Total 30,000
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 Illustration 2- Noninterest bearing note
On January 1, 2013, 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%. The
present value of an ordinary annuity of 1 for three periods at 10%
is 2.4869.
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 Illustration 2- Noninterest bearing note
▰ Accordingly, the unearned interest income and gain on sale of
equipment are computed as follows:
▻ Face value of note 300,000
Present value of note (100,000 x 2.4869) 248,690
Unearned interest income 51,310
 

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 Illustration 2- Noninterest bearing note
▰ Accordingly, the unearned interest income and gain on sale of
equipment are computed as follows:
▻ Present value of note 248,690
Cash received-down payment 100,000
Sale Price 348,690
Cost of equipment (250,00)
Gain on sale of equipment 98,690

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 Illustration 2- Noninterest bearing note
▰ Journal entries for 2013
▻ 1. To record the sale of equipment:
Cash 100,000
Note receivable 300,000
Equipment 250,000
Gain on sale of equipment 98,690
Unearned interest income 51,310
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 Illustration 2- Noninterest bearing note

Date Annual Interest Principal Present

collection income Value
Jan. 1, 2013       248,690
Dec. 31, 2013 100,000  24,869 75,131 173,559
Dec. 31, 2014 100,000 17,356 82,644 90,915
Dec. 31, 2015 100,000 9,085 90,915  

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 Illustration 2- Noninterest bearing note
▰ Journal entries for 2013
▻ 2. To record the first installment collection:
Cash 100,000
Note receivable 100,000
▻ 3. To record the interest income for 2013:
Unearned interest income 24,869
Interest income 24,869

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 Illustration 3- Noninterest bearing note
On January 1, 2013, 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
noninterest bearing note due on January 1, 2016.
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.

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Illustration 3- Noninterest bearing note
Observed that the note is collectible on a lump sum bass after 3
years.
▻ Face of note 400,000
Present Value (400,000 x .7513) 300,520
Unearned Interest Income 99,480

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Illustration 3- Noninterest bearing note

▻ Present value of note 300,520

Cash received 100,000
Sale price 400,520
Carrying amount of equipment (600,000-250,000) 350,000
Gain on sale of equipment 50,520

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 Illustration 2- Noninterest bearing note
▰ Journal entries: 2013
▻ Jan. 1
Cash 100,000
Note receivable 400,000
Accumulated depreciation. 250,000
Equipment 600,000
Gain on sale of equipment 50,520
Unearned interest income 99,480

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 Illustration 2- Noninterest bearing note

Date Interest Unearned Present value

income interest
Jan. 1, 2013   99,480 300,520
Dec. 31, 2013 30,052 69,428 330,572
Dec. 31, 2014 33,057 36,371 363,629
Dec. 31, 2015 36,371  400,000
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 Illustration 2- Noninterest bearing note
▰ Journal entries: 2013
▻ Dec.31
Unearned interest income. 30,052
Interest income 30,052

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 Illustration 2- Noninterest bearing note

▰ Journal entries:

▻ 2014 Dec.31

Unearned interest income 33,057

Interest income 33,057

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 Illustration 2- Noninterest bearing note
▰ Journal entries:
▻ 2015 Dec 31
Unearned interest income 36,371
Interest income 36.371
▻ 2016 Jan, 1
Cash 400,000
Note receivable 400,000

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 Lets Test
Your
Knowledge
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QUIZ

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QUIZ

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ANSWER:

110,000

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 THANKS!
Any questions?
You can find me at
@Ryan Abonales Bagatua & [email protected]

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