ACCOUNTS RECEIVABLE

ESTIMATION OF DOUBTFUL ACCOUNTS

NOTES RECEIVABLE
LOAN RECEIVABLE Prepared by:
Hyacinth Indira D. Hipe
RECEIVABLE FINANCING

OVERVIEW
This module focuses on the accounting concept, measurement and reporting of
receivables and estimation of doubtful accounts. In addition, we will also look into the nature
and accounting treatment for notes and loans receivable. Moreover, the four common forms
of receivable financing as related to accounts receivable will also be part of this module such
as the pledge, assignment, factoring and discounting of note receivable

LEARNING OUTCOMES
At the end of this module, you should be able to:

• To know the classification and presentation of receivables.

• To know the initial and subsequent measurement of accounts receivable.
• To understand the gross method and net method of recording credit sales.
• To know the accounting for doubtful accounts, worthless accounts written off and
recoveries of accounts written off.
• To identify the methods of estimating doubtful accounts.
• To understand the concept and nature of notes receivable including the initial and
subsequent measurement.
• To understand the concept and nature of loan receivable including the initial and
subsequent measurement.
• To identify the sources of financing through receivables.
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2.1 NOTES RECEIVABLE

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Notes receivables are claims supported by formal promises to pay usually in the form
of notes.
Represents claims arising from sale of merchandise or service in the ordinary
course of business.
The note may be payable on demand or a definite future date.

Notes receivable are formal credit arrangements between a creditor (lender) and a
debtor (borrower). Notes arise from loans to other entities including affiliated
companies and to stockholders and employees, from the extension of the credit period
to trade customers, and occasionally from the sale of merchandise, other assets, or
services.
Notes receivable are classified as either current or noncurrent depending on the
expected collection date(s).

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.
Simply stated, a promissory note is a written contract in which one person, know as
the maker, promises to pay another person, known as the payee, a definite sum of
money.

Sample

DISHONORED NOTES

When a promissory note matures and is not paid, it is said to be dishonored.

Dishonored notes receivable 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.

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INITIAL AND SUBSEQUENT MEASUREMENT

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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.
The selling price of P1,000,000 is reasonably
Journal entries assumed to be the present value of the note
because the note is interest bearing.
First year

Note receivable 1,000,000

Land 800,000 When interest is
Gain on sale of land 200,000 “compounded” in the
mathematical parlance
Accrued interest receivable 120,000 this means that any
Interest income 120,000
accrued interest
(12% x 1,000,000)
receivable also earns
interest.

Second year

Accrued interest receivable 134,400

Interest income 134,400

Computation:

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

Third year

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

Computation:

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

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 Illustration 1 – Noninterest bearing note

An entity manufactures and sells machinery. On January 1, 2019, the entity sold
machinery costing P280,000 for P400,000. The buyer signed a noninterest bearing
note for P400,000, payable in four equal installments every December 31. The cash
sales price of the machinery is P350,000.

Journal entries for 2019:

a. To record the sale:

Notes receivable 400,000

Sales 350,000
Unearned interest income 50,000

b. To record the first installment collection:

Cash 100,000
Notes Receivable 100,000

To recognized the unearned interest income over the term of the

note:
Note Receivable Fraction Interest income
2019 400,000 4/10 20,000 4/10 x 50,000 = 20,000
2020 300,000 3/10 15,000
2021 200,000 2/10 10,000
2022 100,000 1/10 5,000
1,000,000 50,000
Unearned interest
The fractions are developed income
from the note receivable
balance every year.

Unearned interest income 20,000

Interest income 20,000

STATEMENT OF FINANCIAL POSITION - DECEMBER 31, 2019

CURRENT ASSET

Note Receivable 100,000

Unearned interest income 15,000
Carrying amount or amortized cost 85,000

NONCURRENT ASSET

Note Receivable 200,000

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

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Illustration 2 – Noninterest bearing note (Installment)

On January 1, 2019, 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.

Computation:

Face value of the note 300,000

Present value (2.4869 x 100,000) 248,690
Unearned interest income 51,310

Present value of note 248,690

Cash received – down payment 100,000
Sales price 348,690
Cost of equipment 250,000
Gain on sale of equipment 98,690

Journal entries for 2019

1. To record the sale of equipment: 2. To record the first installment

collection:
Cash 100,000
Notes receivable 300,000 Cash 100,000
Equipment 250,000 Notes receivable 100,000
Gain on sale of equipment 98,690
Unearned interest income 51,310

3. To record the interest income for 2019:

Unearned interest income 24, 869

Interest income 24,869

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Illustration 3 – Noninterest bearing note (Note is collectible on a lump sum basis)

On January 1, 2019, 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, 2022.

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:

Face value of the note 400,000

Present value (0.7513 x 400,000) 300,520
Unearned interest income 99,480

Present value of note 300,520

Cash received – down payment 100,000
Sales price 400,520
Carrying amount of equipment 350,000 ( 600,000 – 250,000)
Gain on sale of equipment 50,520

Journal entries

2019

Jan.1 Cash 100,000

Notes receivable 400,000
Accumulated depreciation 250,000
Equipment 600,000
Gain on sale of equipment 50,520
Unearned interest income 99,480

Dec. 31 Unearned interest income 30, 052

Interest income 30,052

2020

Dec. 31 Unearned interest income 33, 057

Interest income 33,057

2021

Dec. 31 Unearned interest income 36, 371

Interest income 36,371

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2022

Jan. 1 Cash 400,000

Notes receivable 400,000

This will help

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REFERENCE

Valix, C. T et al., (2020). Intermediate Accounting 1A. Manila: GIC Enterprises & Co., Inc.

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