NOTES RECEIVABLE
Notes receivable – are claims supported by formal promises to pay
usually in the form of notes.
Promissory note – is a written contract when a maker (creditor)
promises to pay the payee (debtor) a definite sum of money at a fixed
and determinable future time.
Dishonored notes – when a promissory note matures and is not paid.
It should be removed from the notes receivable account and
transferred to accounts receivable.
INITIAL MEASUREMENT OF NOTES RECEIVABLE
1. Short-term – measured initially at face amount.
2. Long-term – Depend on whether the notes are interest bearing or
non-interest bearing.
a. Interest bearing – measured initially at face amount which
actually the present value upon issuance. (nakaseparate yung
interest sa face amount and given yung interest rate)
Compounded interest – any accrued interest receivable
also earns interest. (Face amount + accrued interest) ×
(interest rate)
b. Non-interest bearing – measured initially at present value.
Non-interest is a misnomer because all notes implicitly contain
interest. (Included na yung interest sa face amount)
Present value – is the sum of all future cash flows
discounted using the effective interest rate.
SUBSEQUENT MEASUREMENT
Long-term Non-interest bearing notes receivable – measured initially
at amortized cost using effective interest method.
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.
NOTES RECEIVABLE
FORMULAS
1. Interest bearing
accrued interest receivable = interest rate × face
amount
Compounded interest – (face amount + accrued
interest) × (interest rate)
2. Non-interest bearing
NOTE: 4 decimal places for present value factor
Present value = (1 + rate) ÷² =(press equal kung ilang
years)
Present value ordinary annuity = (1 + rate) ÷² =(press
equal kung ilang years) – 1 ÷ rate
AMORTIZATION TABLE USING EFFECTIVE INTEREST
METHOD
1. Equal annual installment
Repayment/ Interest
Principal
annual income Present value
Date (Repayment –
collection (Present (PV - principal)
interest income)
(Given) value × rate)
Jan. 1,
2022
Dec. 31,
2022
2. Lump sum basis (kung yung payment ng note is
sa due date pa or it means walang installment)
Interest
Unearned interest Present value
income
Date (Previous unearned– (PV + interest
(Present value ×
interest income) income)
rate)
Jan. 1, 2022
NOTES RECEIVABLE
Dec. 31, 2022
NOTE: Para makuha yung unearned interest for Jan 2022 is
unearned interest = face amount – present value.
JOURNAL ENTRIES
I. Dishonored notes
Accounts Receivable xxx
Notes Receivable xxx
Interest income xxx
II. Short-term
Notes Receivable 1,000,000
Sales 1,000,000
Or
Notes Receivable 1,000,000
Land and building 800,000
Gain on sale 200,000
III. Long-term
a) Interest bearing
Notes Receivable 1,000,000
Sales
1,000,000
Accrued interest receivable 100,000
Interest income
100,000
Or
Notes Receivable 1,000,000
NOTES RECEIVABLE
Land and building
800,000
Gain on sale
200,000
Accrued interest receivable 100,000
Interest income
100,000
If compounded
2023
Accrued interest receivable 110,000
Interest income
110,000
(1,000,000+100,000 × 10%)
2024
Accrued interest receivable 121,000
Interest income
121,000
(1,100,000+110,000 × 10%)
2025 collection:
Cash 1,464,100
Notes Receivable
1,000,000
Accrued interest income
331,000
Interest income
133,100
b) Non-interest bearing
WITH EQUAL INSTALLMENT
NOTES RECEIVABLE
Sale:
Notes Receivable 1,000,000
Sales
850,000
Unearned interest income 150,000
Or
Notes Receivable 1,000,000
Land and building
750,000
Gain on sale
100,000
Unearned interest income 150,000
Collection:
Cash 200,000
Notes Receivable 200,000
Unearned interest income 30,000
Interest income 30,000
LUMP SUM BASIS (without installment)
Sale:
Cash 100,000
Notes Receivable 900,000
Sales
810,000
Unearned interest income 190,000
Or
2022
Jan, 1 Cash 100,000
Notes Receivable 900,000
Land and building
750,000
Gain on sale
60,000
Unearned interest income 190,000
Dec. 31 Unearned interest income 30,157
Interest income
30,157
NOTES RECEIVABLE
2023
Dec. 31 Unearned interest income 47,358
Interest income
47,358
2024
Dec. 31 Unearned interest income 52,985
Interest income
52,985
2025
Dec. 31 Unearned interest income 59,500
Interest income
59,500
Collection:
Cash 900,000
Notes Receivable
900,000