Precious Grace Ann R.

Loja IA1 March 16, 2020

Chapter Summary of Notes Receivable

The term “notes receivables” represents only claims arising from sale of
merchandise or service in the ordinary course of business.

A negotiable promissory note is an unconditional promise in writing made and signed

by the maker engaging to pay on demand or at fixed determinable future time a sun
certain in money to order to the payee.

 Thus, notes received from officers, employees, shareholders and affiliates shall
be designated separately.

What if the promissory note matures and is not paid? Apparently, promissory notes
that are already due are said to be dishonored as a notes receivables, since the
essence of it as a negotiable instrument has lost its part and should be transferred from
notes receivables to accounts receivable.

Dishonored notes should be recorded as follows:

Accounts Receivable xx
Notes Receivable xx
Interest Income xx

Initial measurement of notes receivable

Short-term notes receivable are measured at face value.

Why at face value? Because the effect of discounting short-term notes receivable is
usually immaterial.

Long-term notes receivable are initially measured depends on whether the notes are
interest-bearing or noninterest-bearing.

Interest-bearing long-term 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.
 After the initial measurement, there is a following measurement.

Subsequent to initial measurement

Long-term notes receivable shall be measured at amortized cost using the effective
interest method.

a. Interest bearing note

Illustration from Financial Accounting 2013 by Valix, Problem 7-2 (ACP)

Feasible Company sold to another entity a tract of land costing P5,000,000 for
P7,000,000 on January 1, 2018. The buyer paid P1,000,000 down and signed a two-
year promissory note for the remainder of the purchase price plus 12% interest
compounded annually. The note matures on January 1, 2020.

Journal Entries for the First Year (2018)

Cash P1,000,000
Notes Receivable 6,000,000
Land P5,000,000
Gain on sale of land 2,000,000

Journal Entries for the Second Year (2019)

Accrued interest receivable (6,000,000 * 12%) P 720,000
Interest Income P 720,000

Journal Entries for the Third Year (2020)

Cash (6,000,000)[(1+0.12)^2] P7,526,400
Notes Receivable P6,000,000
Accrued interest receivable 720,000
Interest income (6,720,000*12%) 806,400
b. Noninterest-bearing note

Illustration from Financial Accounting 2013 by Valix, Problem 7-3 (ACP)

Bygone Company manufactures and sells computers. On January 1, 2018, the entity
sold a computer costing P400,000 for P600,000. The buyer signed a noninterest
bearing note for P600,000 payable in three equal installments every December 31. The
cash selling price of the computer is P540,000.

Journal Entries for the First Year (2018)

To record the sale:
Note Receivable P 600,000
Sales P 540,000
Unearned interest income 60,000

To record the first installment collection:

Cash P 200,000
Unearned interest income (60,000)(6/12) 30,000
Note Receivable P 200,000
Interest income 30,000

If a statement of financial position is prepared on December 31, 2018, the current

portion of the note receivable is classified as current asset.
Amortized Cost= Note receivable current portion - Unearned interest income
For me to remember this, I made the formula look like this
AC = NRCP - UII
AC = P200,000 – 20,000 = P180,000