NOTES RECEIVABLE o Initial measurement

At initial recognition, an entity shall measure a loan

Claims supported by formal promises to pay usually in receivable at fair value plus transaction costs that are
the form of notes. directly attributable to the acquisition of the financial
asset.

represents only claims arising from sale of Transaction costs that are directly attributable to the
merchandise or service in the ordinary course of loan receivable include direct origination costs.
business.
Direct origination costs should be included in
Thus, notes received from officers, employees, the initial measurement of the loan
shareholders and affiliates shall be designated receivable.
separately.
However, indirect origination costs should
Initial measurement be treated as outright expense.
Conceptually, notes receivable shall be measured
initially at present value. o Subsequent measurement
PFRS 9 provides that if the business model in
However, short-term notes receivable shall be managing financial assets is to collect contractual
measured at face value. cash flows on specified dates and the contractual cash
flows are solely payments of principal interest, the
o Cash flows relating to short-term notes financial asset shall be measured at amortized cost.
receivable are not discounted because the
effect of discounting is usually not material. Accordingly, a loan receivable is measured at
amortized cost using the effective interest method.
Interest-bearing notes receivable
o Origination fees
o Measured at face value which is actually the Lending activities usually precede the actual
present value upon issuance. disbursement of funds and generally include efforts
to identify and attract potential borrowers and to
Noninterest-bearing notes receivable originate a loan.

o Measured at present value which is the The fees charged by the bank against the borrower
discounted value of the future cash flows
using the effective interest rate.

Subsequent measurement o Impairment of loan

Subsequent to initial recognition, long-term notes PFRS 9 provides that an entity shall recognize a
receivable shall be measured at amortized cost using loss allowance of expected credit losses on
the effective interest method. financial asset measured at amortized cost.

Meaning of amortized cost An entity shall measure the loss allowance for a
financial instrument at an amount equal to the
receivable is measured initially: lifetime expected credit losses if the credit risk on
that financial instrument has increased
Minus principal repayment significantly since initial recognition.

Plus or minus cumulative amortization of o Measurement of impairment

any difference between the initial carrying The amount of impairment loss can be measured as
amount and the principal maturity amount the difference between the carrying amount and the
present value of estimated future cash flows
Minus reduction for impairment or discounted at the original effective rate.
uncollectibility
The computation corresponding entry shall be as
For long-term noninterest-bearing notes receivable, follows:
the amortized cost is the present value plus PV of expected cash flows X
amortization of the discount, or the face value minus Less: Face value X
the unamortized unearned interest income. Accrued interest X X
Loan impairment loss (X)

LOAN RECEIVABLE Loan impairment loss xx

Interest receivable xx
A financial asset arising from a loan granted by a bank Allowance for loan xx
or other financial institution to a borrower or client. impairment

- - END - -

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 NOTES AND LOANS RECEIVABLE AND IMPAIRMENT

THEORY

1. Loans and receivables are

a. Nonderivative financial assets with fixed or determinable payments that are not quoted in
an active market
b. Nonderivative financial assets with fixed or determinable payments that are quoted in an
active market
c. Nonderivative financial assets without fixed or determinable payments that are not
quoted in an active market
d. Nonderivative financial assets without fixed or determinable payments that are quoted in
an active market

2. All of the following are characteristics of financial assets classified as loan and receivables except
a. They are not quoted in an active market
b. They have fixed or determinable payments
c. The holder has demonstrated positive intention and ability to hold them to maturity
d. The holder can recover substantially all of its investment (unless there has been credit
deterioration)

3. Initially, loans and receivables are measured at

a. Fair value
b. Fair value plus transaction costs that are directly attributable to the acquisition
c. Maturity value
d. Maturity value plus transaction costs that are directly attributable to the acquisition

4. Subsequent to initial recognition, loans and receivables are measured at

a. Cost
b. Amortized cost using the straight-line method
c. Amortized cost using the effective interest method
d. Fair value

5.
a. The loan receivable is measured initially minus principal repayment, plus or minus the
cumulative amortization of any difference between the initial amount recognized and the
principal maturity amount, minus reduction for impairment
b. The loan receivable is measured initially minus principal repayment, plus or minus
amortization recognized and the principal maturity amount
c. The loan receivable is measured initially
d. The loan receivable is measure initially minus principal payment

6. Long-term notes receivable which nominally bear no interest or an interest which is unreasonably
low should be recognized initially at
a. Face value c. Maturity value
b. Present value d. Net realizable value

7. Assuming that the ideal measure of short-term receivable in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make
the balance sheet misleading because
a. The amount of discount is not material
b. Most receivables can be sold to a bank or factor
c. Most short-term receivables are not interest-bearing
d. The allowance for uncollectible accounts includes a discount element

8. Accounting for the interest in a non-interesting bearing note receivable is an example of what
aspect of accounting theory?
a. Matching c. Substance over form
b. Verifiability d. Accounting entity

9. On January 1 of the current year, an entity obtained a two-year 8% note receivable for services
rendered. At that time, the market rate of interest was 10%. The face amount of the note and the
entire amount of interest are due on the date of maturity. Interest receivable on June 30 of the
current year is
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 a. 4% of the face amount of the note c. 4% of the present value of the note
b. 5% of the face amount of the note d. 5% of the present value of the note

10. The carrying value of an impaired note immediately after the recognition of the impairment loss is
the
a. Nominal sum of remaining cash flows to be received
b. The book value before the impairment is recognized less accrued interest
c. Present value of remaining cash flows to be received, discounted at the current market
rate of interest
d. Present value of remaining cash flows to be received, discounted at the original interest
rate implicit in the note

11. If there is an evidence that an impairment loss on loan receivable has been incurred, the amount
of the loss is equal to the
a. Excess of the principal amount of the loan over its carrying amount
b. Excess of the carrying amount of the loan over the principal amount of the loan
c. Excess of the present value of cash flows related to the loan over the carrying amount of
the loan receivable
d. Excess of the carrying amount of the loan receivable over the present value of the cash
flows related to the loan

12. The carrying value of an impaired note before recognizing a loan impairment
a. Includes accrued interest
b. Excludes accrued interest
c. Is less than the carrying value after recognizing the impairment
d. Is the same as the carrying value after recognizing the impairment

13. The discount on notes receivable represents

a. Unearned interest c. Prime interest
b. Prepaid interest d. Accrued interest

14.
receivables?
a. Included in profit or loss
b. Part of the initial carrying amount of the loans receivable and amortized using the effective
interest method
c. Part of the initial carrying amount of the loans receivable and amortized using the straight-
line method
d. Charged directly to retained earnings

ILLUSTRATIVE EXAMPLES

1. [Notes receivable] Pinnacle Company sold to another entity a tract of land costing P5,000,000 for
P7,000,000 on January 1, 2025. The buyer paid P1,000,000 down and signed a two-year promissory note
for the remainder of the purchase price plus 12% interest payable annually every December 31. The note
matures on January 1, 2027.

Requirement: Prepare journal entries for 2025, 2026 and 2027.

2. Pinnacle Company manufactures and sells electrical generators. On January 1, 2025, the entity sold an
electrical generator costing P700,000 for P1,000,000.

The buyer paid P100,000 down and signed a P900,000 non-interest bearing note payable in three equal
installments every December 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.

Requirement: Prepare journal entries for the current year.

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 3. On December 31, 2025, ABC Company sold an equipment with a carrying amount of P2,000,000 and
received a non-interest bearing note requiring payment of P500,000 annually for ten years. The first
payment is due December 31, 2026.

The prevailing rate of interest for this type of note at date of issuance is 12%
Present value of 1 at 12% for 10 periods 0.322
Value of ordinary annuity of 1 at 12% for 10 periods 5.650
1. On December 31, 2025, what is the carrying amount of the note receivable?
a. P5,000,000
b. P2,175,000
c. P1,610,000
d. P2,825,000

2. What is the gain on sale of equipment to be recognized in 2025?

a. P3,000,000
b. P2,175,000
c. P825,000
d. P0

3. What amount of interest income should be recognized for 2026?

a. P600,000
b. P339,000
c. P319,800
d. P300,000

4. What is the carrying amount of the note receivable on December 31, 2026?
a. P2,325,000
b. P4,500,000
c. P2,825,000
d. P2,664,000

4. [Loans receivable] XYZ Bank granted a loan to a borrower on January 1, 2025. The interest rate on the
loan is 10% payable annually starting December 31, 2025. The loan matures in five years on December 31,
2029.
Principal amount P4,000,000
Direct origination cost 61,500
Origination fee received from borrower 350,000
The effective rate on the loan after considering the direct origination cost and origination fee received is
12%
Requirements:
1. Compute the carrying amount of the loan receivable on January 1, 2025.
2. Prepare a table of amortization for the loan receivable.
3. Prepare the journal entries for 2025 and 2026.

5. [Loan impairment] On January 1, 2025, ABC Bank loaned P3,000,000 to a borrower. The contract specified
that the loan had a 6-year term and a 9% interest rate. Interest is payable annually every December 31
and the principal amount will be collected on December 31, 2030. Interest is collected for 2025.

On December 31, 2025, the bank determined that the loan has a 12-month probability of default of 2%
and expected to collect only 90% of the loan.

On December 31, 2026, the bank determined that there is a significant increase in the credit risk of the
loan but no objective evidence of impairment. Based on relevant information, the bank concluded that
there is a 30% probability of default over the remaining term of the loan and it is expected that only 60%
of the loan will be collected. Interest is collected for 2026.

On December 31, 2027, the borrower was under financial difficulty and the loan was considered impaired.
The bank agreed that only 40% of the principal will be collected on the due date. Interest is collected for
2027.

The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods and 0.77 for three periods.
Requirements:
1. Prepare the journal entries for 2025, 2026 and 2027.
2. Compute the carrying amount of the loan receivable on December 31, 2025, 2026 and 2027.
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 MAIN PROBLEMS
1. Gel Company is a dealer in equipment. On December 31, 2021, the company sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500,000. The first
payment was made December 31, 2022. The market interest for similar notes was 8%. The relevant
present value factors are:
PV of 1 @ 8% for 5 periods .68
PV of an ordinary annuity of 1 @ 8% for 5 years 3.99
Question 1: In its December 31, 2021 statement of financial position, what should it report as notes
receivable?
a. P2,500,000 c. P1,700,000
b. P1,995,000 d. P1,495,000

Question 2: What interest income should be reported for 2022?

a. P505,000 c. P159,600
b. P101,000 d. P119,600

2. Erwin Bank grants a 10-year loan to X Company in the amount of P1,500,000 with a stated interest
rate of 6%. Payments are due monthly and are computed to be P16,650. The bank incurs P40,000
of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, the bank
charges X a 4-point nonrefundable loan origination fee.
Question 1: The bank, the lender, has a carrying amount of:
a. P1,440,000 c. P1,500,000
b. P1,480,000 d. P1,520,000

Question 2: X, the borrower, has a carrying amount of:

a. P1,440,000 c. P1,500,000
b. P1,480,000 d. P1,520,000

3. On January 1, 2018, Yonina Company loaned P3,000,000 to X Inc. The terms of the loan were
payment in full on January 1, 2023, plus annual interest payments at 11%. The interest payment
was made as scheduled on January 1, 2019; however, due to financial setbacks, X Inc. was unable
to make its 2020 interest payment. The company considers the loan impaired and projects the
following cash flows from the loan as of December 31, 2020 and 2021. Assume that it accrued the
interest on December 31, 2019 but did not continue to accrue interest afterwards due to the
impairment of the loan.
Amount projected as of Period PVF at 11%
Date of Flow Dec. 31, 2020 Dec. 31, 2021 1 0.9009
December 31, 2021 P200,000 P200,000 2 0.8116
December 31, 2022 400,000 600,000 3 0.7312
December 31, 2023 800,000 1,200,000 4 0.6587
December 31, 2024 1,200,000 1,000,000 5 0.5935
December 31, 2025 400,000

Question 1: Loan impairment loss in 2020

a. P882,380 c. P1,212,380
b. P1,549,500 d. P1,542,380

Question 2: Interest income for 2021 assuming the P200,000 was collected on December 31, 2021
as scheduled
a. P195,855 c. P200,000
b. P232,938 d. P66,000

Question 3: Allowance for loan impairment as of December 31, 2021

a. P554,340 c. P649,442
b. P752,640 d. P776,900

Question 4: Interest income in 2022 assuming the P600,000 was collected on December 31, 2022
as scheduled
a. P225, 210 c. P236,561
b. P247,023 d. P222,541

Question 5: Carrying amount of loan receivable as of December 31, 2022

a. P1,672,570 c. P1,645,641
b. P2,150,558 d. P1,892,683
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