Notes Receivable

Conceptual Framework and Accounting Standards

 Definition of Notes Receivable

Notes Receivable – claims supported by formal promises to pay usually in the form of
notes
 Parties involved:
 Maker (the person who promises to pay)
 Payee (the person to whom the promise is made)
 Notes receivable represents only claims arising form the sale or service in the
ordinary course of business. Hence, non-trade notes receivable (receivable from
officers, employees, shareholders, etc.) are designated separately

 Measurement of Notes Receivable

Initial Measurement: At Present Value (the sum of all future cash flows discounted
using the prevailing market rate of interest for similar notes)
At Face Value (for short-term notes receivable)
Subsequent Measurement: At Amortized Cost (using effective interest method)

Computation

Notes receivable (initial measurement) P xxx

Less: Principal repayment xxx
Add/Less: *Cumulative amortization xxx *Cumulative amortization of any difference
Less: Impairment or uncollectibility xxx between the initial carrying amount and the
principal maturity amount
Amortized Cost P xxx

 Measurement for interest-bearing notes receivable

Initial Measurement: At Face Value (present value upon
issuance) Amortized cost for interest
Subsequent Measurement: At Face Value bearing note is not applicable

 Measurement for noninterest-bearing notes

receivable
Initial Measurement: At Present Value
Subsequent Measurement: At Amortized Cost
See Lesson 7.1 Supplementary
Material for Illustrative Problems
on Notes Receivable
The term “noninterest-bearing” is a misnomer
because all notes implicitly contain interest. It is
simply a case of “interest being included in the
face amount” rather than being stated as a
separate rate
 Dishonored Notes – matured notes not paid
 Shall be removed from the notes receivable account and transferred to accounts
receivable at an amount to include interest and other charges

Journal Entry

Accounts receivable xxx

Notes receivable xxx
Interest income xxx