Chapter 6 – Notes Receivable Amortized Cost is the amount at which the

note receivable is measured initially.

Notes receivable are claims supported by
formal promises to pay usually in the form of a. Minus principal payment
notes. b. Plus or Minus cumulative
amortization of any difference
A negotiable promissory note, a promissory
between the initial carrying amount
note is a written contract in which one
and the principal maturity amount.
person, known as the maker, promises to pay
c. Minus reduction for impairment or
another person, known as the payee, a
uncollectibility.
definite sum of money.
Long-term noninterest-bearing notes
When a promissory note matures and is not
receivable, the amortized cost is the present
paid, it is said to be dishonored.
value plus amortization of the discount, or the
Initial Measurement of notes receivable face value minus the unamortized unearned
interest income.
Notes receivable shall be measures initially at
present value

- Present value is the sum of all future

cash flows discounted using the
prevailing market rate of interest for
similar notes.

Short-term notes receivable shall be

measured at face value

- Cash flows relating to short-term

notes receivable are not discounted
because the effect of discounting is
usually not material.

Initial measurement of long-term notes will

depend on whether the notes are interest-
bearing or noninterest bearing.

Interest bearing notes are measured at face

value which is actually the present value upon
issuance.

Noninterest-bearing long-term notes are

measured at present value which is the
discounted value of the future cash flows
using the effective interest rate.

- “Noninterest-bearing” is a misnomer
because all notes implicitly contain
interest.

Subsequent Measurement

Long-term notes receivable shall be measured

at amortized cost.
Illustration-Interest bearing note

An entity owned a tract of land costing P650,000 and sold the land for P900,000.

The entity received a 3-year note for P900,000 plus interest of 12% compounded annually.

The Selling price of P900,000 is reasonably assumed to be the present value of the note because the
note is interest bearing.

Date Interest Present Value

900,000
First year 108,000 1,008,000
Second Year 120,960 1,128,960
Third Year 135,475 1,264,435

Journal Entries

First Year

Notes Receivable 900,000

Land 650,000

Gain on Sale 250,000

Accrued Interest Receivable 108,000

Interest Income 108,000

Second Year

Accrued Interest Receivable 120,960

Interest Income 120,960

Third Year

Cash 1,264,435

Notes Receivable 900,000

Accrued Interest Receivable 228,960

Interest Income 135,475

Illustration – Noninterest-bearing note (Annual Payment, Given Cash Sale Price)

An entity manufactures and sells machinery, On January 1, 2020, the entity sold machinery costing
500,000 for 800,000.

The buyer signed a noninterest bearing note for 800,000, payable in four equal installments every
December 31.

The cash sale price of the machinery is 700,000.

Date Notes Receivable Fraction

2020 800,000 4/10
2021 600,000 3/10
2022 400,000 2/10
2023 200,000 1/10
2,000,000

Face Value of the note 800,000

Present Value – Cash Sale price 700,000

Unearned Interest Income 100,000

Date Payment Unearned Interest Amortized Cost Present Value

Income
700,000
2020 200,000 40,000 160,000 540,000
2021 200,000 30,000 170,000 370,000
2022 200,000 20,000 180,000 190,000
2023 200,000 10,000 190,000 -0-

Journal Entries

Jan 1, 2020 Notes Receivable 800,000

Sales 700,000

Unearned Interest Income 100,000

Dec 31,2020-23 Cash 200,000

Notes Receivable 200,000

2020 2021 2022 2023

Unearned Interest Income 40,000 30,000 20,000 10,000

Interest Income 40,000 30,000 20,000 10,000

Illustration – Noninterest-bearing Note (Annual Payment, Not given cash sale price)

On January 1, 2020, an entity sold an equipment with a cost 500,000 for 800,000.

The buyer paid a down of P200,000 and signed a noninterest bearing note for 600,000 payable in
equal annual installment of 200,000 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% 2.4869.

The present value of the note is computed by multiplying the annual installment of 200,000 by the
present value factor of 2.4869 or P497,380.

Date Annual Collection Interest Income Principal Present Value

(PVx10%)
497,380
2020 200,000 49,738 150,262 347,118
2021 200,000 34,712 165,288 181,830
2022 200,000 18,170 181,830 -0-

Journal Entries

Jan 1, 2020 Cash 200,000

Notes Receivable 600,000

Equipment 500,000

Gain on sale of equipment 397,380

Unearned Interest Income 102,620

Dec 31, 2020 Cash 200,000

Notes Receivable 200,000

2020 2021 2022

Unearned Interest Income 49,738 34,712 18,170

Interest Income 49,738 34,712 18,170

Illustration – Noninterest-bearing note (Lumpsum Collection, Not given Cash sale price)

On January 1, 2020, an entity sold an equipment costing P500,000 with accumulated depreciation
150,000.

The entity received as consideration P200,000 cash and a P600,000 noninterest bearing notes due
on January 1,2023.

The prevailing rate of interest for a note of this type is 10%. The present value of 1 at 10% for 3 years
id 0.7513.

Interest Income Unearned Interest Present Value

(PVx10%) Income
149,220 450,780
45,078 104,142 495,858
49,586 54,556 545,444
54,556 -0- 600,000

Journal Entries

Jan 1, 2020 Cash 200,000

Notes Receivable 600,000

Accumulated Depreciation 150,000

Equipment 500,000

Gain on Sale of Equipment 300,780

Unearned Interest Income 149,220

Dec 31, 2020 Unearned Interest Income 45,078

Interest Income 45,078

Dec 31, 2021 Unearned Interest Income 49,586

Interest Income 49,586

Dec 31, 2022 Unearned Interest Income 54,556

Interest Income 54,556

Jan 1, 2023 Cash 600,000

Notes Receivable 600,000