(*) - connected with the corresponding text

(-) side notes / explanations

Chapter 5A

Notes Receivable - Subject to Present Value

Time Value of Money

Money today is worth more than the same amount in the future. In short, the longer you wait, the
lower the value becomes.

Computing the Present Value of Cash Flows

● Present value(PV) - What is the value today of money to be received in the future?

PV = Future Cash Flow x PV Factor

Present Value Factors:

PV Factor Meaning Payment Formula

Single Only one lump sum Paid once at PV= FV X (1+i)^-n

payment received in the future maturity date

Ordinary Equal amounts received At the end of PV = 1-(1+i)^-n

Annuity repeatedly each period i

Annuity Equal amounts received At the start of PV = PV of Ordinary Annuity x (1+i)

Due repeatedly each period
i = rate
n = time

SINGLE PAYMENT - ILLUSTRATION

Scenario: ABC company expects 5,000 after 3 years with interest rate of 10%.
Formula: PV= FV X (1+i)^-n

PVsing = 5,000 x (1.10)^-3 = 3,756.50

ORDINARY ANNUITY - ILLUSTRATION

Scenario: DEF company will receive 1,000,000 each year for 5 years, with a 10% rate.
Formula: PV = 1-(1+i)^-n
i

PV = 1- (1.10)^-5
0.10
PVord = 3.79 x 1,000 = 3,790
if manual,
PV= (1.10)^-5 = 0.621
PV = 1 - 0.621 = 0.379
PV = 0.379 / 0.10 = 3.79
PVord = 3.79 x 1,000 = 3,790

ANNUITY DUE - Illustration

Scenario: In connection with above illustration, but assuming it will be received at the start of each
year.
Formula: PV = PV of Ordinary Annuity x (1+i)

PVord = 3,790
PVdue = 3,790 x 1.10 = 4,169

Present Value Factors Applied in the Initial Measurement of

Noninterest-Bearing Notes Receivable
In general, the initial measurement for NR is at fair value. The fair value of Non
Interest bearing note is equal to the present value of the cas flows discounted using the market rates on
the initial recognition.

Present Value Amount (PVA) = Cash flow x relevant PV factor

● The amount and the frequency of cash flows shall be used as the bases in determining the
relevant PV factors.

In general:
PV factor Single Payment PV factor Ordinary Annuity PV factor Annuity Due

Term notes Serial notes (end) Serial Notes (beginning)

*CF = face amount CF = periodic installment CF = Periodic installment

amount amount
*CF - Cash flow

Subsequent Measurement of Noninterest-Bearing Note Receivable

Date Payments Interest Income Amortization Present value/
Received Carrying amount

Meaning Serial notes Actual cash a.k.a accretion of Adjustments to The book value
Period when cash inflows (principal interest. carrying amount. of the note at the
flow is received + interest) reporting date
Even if the note is The difference
Term notes noninterest-bearing, between interest
Period at the end we still compute income and
of the term interest based on amount received.
market rate

Computation - Given in the note Beginning Carrying *IC greater than Beg. Bal
terms amount x Effective AmR = Addition + or -
interest rate Amortization
 IC less than
**AmR =
deduction

*IC - Interest income

**AmR - Amount Received

TERM NOTE - Illustration (1&3)

Company: Lucban company
Carrying amount 4,000,000
Face value: 7,500,000 ( payable at maturity date)
Term : 4 yrs
Rate: 9%

The note is payable in full at the end, use PV single payment. (PV= FV x (1+i)^-n)

Initial fair value

PVsing = 7,500,000(1.09) ^-4 =5,313,188

Unearned finance income

Face Value - Initial Fair Value
7,500,000 - 5,313,188 =2,186,812

Jan 2023 Notes Receivable 7,500,000*

Land 4,000,000

Gain on sale of land (squeeze) 1,312,188

Unearned finance income** 2,186,812

*NR is always debited at face amount, not fair value
**Unearned Finance income represents the total interest income to be recognized over 4 years

Subsequent accounting for Notes Reeceivable

Date Pmts. *Interest (9%) **Amortizatio ***PV / CA NR ****UFI
Received n

Jan 2023 - - - 5,313,188 7.5M 2,186,812

Dec 2023 - 478, 187 478, 187 5,791,375 7.5M 1,708,625

2024 - 521,224 521,224 6,312,599 7.5M 1,187,401

2025 - 561,134 561,134 6,880,733 7.5M 619,267

2026 7,500,000 619,267 619,267 - - -

Payments received
● NR will only be paid at maturity date 2026.

Interest income
 ● Beg. PV/CA amount per year x rate
● EXAMPLE (5,313,188 x 0,09 = 478,187) and ( 5,791,375 x 0.09 = 521,224)

Amortization
● Same with Interest income because no actual payments are received until maturity.

Present value / Carrying amount

● Old PV + Amortization
● EXAMPLE ( 5,313,188 + 478,187= 5,791,375) and (5,791,375 + 521,224 =6,312,599)

Notes Receivable
● Remains the same until paid in maturity date (2026)

Unearned Finance Income

● New UFI - Interest income
● EXAMPLE (2,186,812 - 478,187 =1,708,625 1,708,625) and (1,708,625-521,224=1,187,401)

Journal entries subsequent to initial recognition will be based on the amounts appearing in the
amortization table:
Dec 31, 2023 Unearned finance Finance income 478,187

Interest income 478,187

Dec 31, 2024 Unearned finance income 521,224

Interest income 521,224

Dec 31, 2025 Unearned finance income 568,134

Interest income 568,134

Dec 31, 2026 Unearned finance income 619,267

Interest income 619,267

Cash 7,500,000

Notes Receivable 7,500,000

Reporting of Receivables subjected to PV calculations:

Date P.V / C.A Current Noncurrent

Jan 2023 5,313,188

Dec 2023 5,791,375 - 5,791,375

 Dec 2024 6,312,599 - 6,312,599

Dec 2025 6,880,733 6,880,733* -

Dec 2026 - - -
*Because the note is only collectible at its maturity date
-The carrying amount of a term note goes up over time because of adding interest.

SERIAL NOTE - Illustration (2&4)

Company: Tayabas Company
Face amount 5,000,000 ; Noninterest-bearing
Carrying amount of Equipment: 4,500,000 (Cost-6M ; AccDep-1.5M)
Rate: 10%
Terms: 1,000,000 ; annually for 5 years

Since it will be paid in equal periodic payment at the end of each year, we use PV factor of ordinary
annuity. PV = 1-(1+i)^-n
i
Initial fair value:
PVord = 1,000,000 x 1-(1.10)^-5 = 3,790,787
0.10

Unearned Finance Income:

3,790,787 - 5,000,000 = 1,209,213

Jan 2023 Notes receivable 5,000,000

Accumulated Depreciation 1,500,000

Loss on sale (squeeze) 709,213

Equipment 6,000,000

Unearned finance income 1,209,213

Subsequent accounting for Notes Reeceivable

Date Pmts. Interest (10%) Amortization PV / CA NR UFI
Received

Jan ‘23 - - - 3,790,787 5,000,000 1,209,213

Dec ‘23 1M 379,079 (620,921) 3,169,886 4,000,000 830,134

2024 1M 316,987 (683,013) 2,486,853 3,000,000 513,147

2025 1M 248,685 (751,315) 1,735,538 2,000,000 264,462

2026 1M 173,554 (826,446) 909,092 1,000,000 90,908

2027 1M 90,908 (909,092) - - -

Payment received
● the actual 1,000,000 cash installments received yearly

Interest income
● Beg. PV/CA amount per year x rate
● EXAMPLE (3,790,787 x 0.10 =379,079) and (3,169,886 x 0.10 =316,987)

Amortization
● Payments Received - Interest portion
● EXAMPLE (1,000,000 - 379,079 =620,921) and (1,000,000 - 316,987=683,013)

Pwesent value / Carrying amount

● Balance of the NR at present value after each year
● New PV/CA amounts per year - amortization
● EXAMPLE (3,790,787 - 620,921=3,169,866) and (3,169,866-683,013=2,486,853)

Notes Receivable
● Face value that is decreasing (what the customer still owes)
● In this case, since 5M is equally paid at 1M for 5 years, so its decreasing yearly.

Unearned Finance Income

● The remaining discount still unrecognized as interest income
● New UFI - Interest
● EXAMPLE (1,209,213-379,079=830,134) and (830,134-316,987=513,147)

ACTUAL ROW BY ROW BREAKDOWN:

Jan 2023 (Initial recognition)
● Carrying Amount (PV): ₱3,790,787
● Notes Receivable (face): ₱5,000,000
● Unearned Finance Income: ₱1,209,213

Dec 2023
● Payment Received: ₱1,000,000
● Interest Income = 3,790,787 × 10% = ₱379,079
● Amortization = Payment − Interest = 1,000,000 − 379,079 = ₱620,921
● New Carrying Amount = 3,790,787 − 620,921 = ₱3,169,866
● Notes Receivable balance drops from 5M → 4M
● Unearned Finance Income reduces to ₱830,134 (1,209,213 − 379,079)

Dec 2024
● Payment Received: ₱1,000,000
● Interest Income = 3,169,866 × 10% = ₱316,987
● Amortization = 1,000,000 − 316,987 = ₱683,013
● New Carrying Amount = 3,169,866 − 683,013 = ₱2,486,853
● Notes Receivable: 3M
● Unearned Finance Income: ₱513,147
Dec 2025
● Payment: ₱1,000,000
● Interest = 2,486,853 × 10% = ₱248,685
● Amortization = 1,000,000 − 248,685 = ₱751,315
● Carrying Amount = 1,735,538
● Notes Receivable: 2M
● Unearned Finance Income: ₱264,462

Dec 2026
● Payment: ₱1,000,000
● Interest = 1,735,538 × 10% = ₱173,554
● Amortization = 1,000,000 − 173,554 = ₱826,446
● Carrying Amount = 909,092
● Notes Receivable: 1M
● Unearned Finance Income: ₱90,908

Dec 2027
● Payment: ₱1,000,000
● Interest = 909,092 × 10% = ₱90,908
● Amortization = 1,000,000 − 90,908 = ₱909,092
● Carrying Amount = 0
● Notes Receivable: 0
● Unearned Finance Income: 0

Each year, entries are based on amortization table:

Dec 2023 Unearned finance income 379,079

Interest income 379,079

Cash 1,000,000

Notes receivable 1,000,000

Dec 2024 Unearned finance income 316,987

Interest income 316,987

Cash 1,000,000

Notes receivable 1,000,000

And so on…

Reporting of Receivables subjected to PV calculations

Date Amortization PV / CA Current* Noncurrent**
 Jan 2023 - 3,790,787 - -

Dec 2023 (620,921) 3,169,886 683,013 2,486,853

Dec 2024 (683,013) 2,486,853 751,315 1,735,538

Dec 2025 (751,315) 1,735,538 826,446 909,092

Dec 2026 (826,446) 909,092 909,092

Dec 2027 (909,092) -

*Current portion at each reporting date = amount of amortization expected in the next year
**Noncurrent portion at each reporting date = carrying amount at the end of the reporting period

Application of PV Factors in the Initial Measurement of

Interest-Bearing Notes Receivable but with Stated Rate ≠ Market
Rate

ILLUSTRATION 5
Company: Sampaloc company
Land sold: 9,000,000
Carrying amount:5,500,000
Down payment (cash): 2,000,000
Face value of Note: 7,000,000
Stated rate: 6%
Market rate: 11%
Term 3 years ; annually

NOTE :
● When the stated rate (6%) ≠ market rate (11%), we don’t just record the note at face value
(7M). Instead, we compute its PV at fair value by discounting cash flows.

Identify Cash Flows:

Since the principal (7M) be paid only on maturity date, we use PV factor of single payment

● PVsing= 7,000,000 x (1.11)^-3 = 5,118,337

Since the interest is paid annually for 3 years, we use PV factor of ordinary annuity

● PVord = 420,000 - (1.11)^-3 = 1,026,360

0.11

Total PV (New fair value of note)

● 5,118,337 + 1,026,360 =6,144,697

To find Unearned finance income:

Face value - New fair value
 ● 7,000,000 - 6,144,697 =855,303

Notes Receivable 7,000,000

Cash 2,000,000

Land 5,500,00

Unearned finance income 855,303

Gain on sale of land (squeeze) 2,644,697

Subsequent Measurement of Interest-Bearing Notes Receivable but

with Stated rate ≠ Market rate
Date Pmts. Interest Amortizatio PV / CA NR UFI
Received (11%) n

Jan 2023 - - - 6,144,697 7M 855,303

Dec 2023 420,000 675,917 255,917 6,400,614 7M 599,386

Dec 2024 420,000 704,068 284,068 6,684,682 7M 315,318

Dec 2025 7,420,000* 735,318 315,318 7,000,000 0 -

=0
*Principal (7,000,000) + Final interest (420,000)

NOTE:
Same computation with before
Interest income = Carrying amount x interest 11% (market rate at initial recognition)
Payments received = Carrying amount x interest 6% (stated rate)
Unearned finance income = Interest income - Cash received

2023 Cash 420,000

Unearned finance income 255,917

Interest income 675,917

2024 Cash 420,000

Unearned finance income 284,068

Interest income 704,068

2025 Cash 7,420,000

Unearned finance income 315,318

Interest income 735,318

 Notes receivable 7,000,000

Concept of Day 1 Loss

When a company lends money (note selling an asset), the fair value of the note receivable is often less
than the cash lent. This difference is called a Day 1 Loss
● It is recognized immediately in profit or loss
● Later, it gets recovered as interest income during amortization.

ILLUSTRATION 7
Company: Mauban company
Loan made: 8,000,000
Term: 4 years maturity ; Noninterest- bearing note
Rate: 8%

Since payment will happen after maturity, we will use PV single payment

Initial fair value

PVsingle = 8,000,000 x (1.08)^-4 = 5,880,240

Unearned finance income

8,000,000 - 5,880,240 =2,119,760

Day 1 Loss
Same with UFI = 2,119,760
● Loss since the lent 8,000,000 is less than worth of fair value 5,880,240

Jan 2023 Notes receivable 8,000,000

Day 1 Loss 2,119,760

Cash 8,000,000

Unearned finance income 2,119,760

Amortization table
Date Pmts. Interest Amortizatio PV / CA NR UFI
Received (8%) n

Jan 2023 - - - 5,880,240 8M 2,119,760

Dec 2023 - 470,419 470,419 6,350,659 8M 1,649,341

2024 - 508,053 508,053 6,858,712 8M 1,141,288

2025 - 548,697 548,697 7,407,409 8M 592,591

 2026 8,000,000 592,591 592,591 8,000,000 8M 0
-Same computation with how I compute the other tables

Dec 2023 Unearned finance income 470,419

Interest income 470,419

Dec 2024 Unearned finance income 508,053

Interest income 508,053

Dec 2025 Unearned finance income 548,697

Interest income 548,697

Dec 2026 Cash 8,000,000

Unearned finance income 592,591

Interest income 592,591

Notes receivable 8,000,000