CHAPTER 6 PART 1- NOTES RECEIVABLES

LEARNING OBJECTIVES:
At the end of this chapter, the student should be able to:
1. To understand the concept and nature of notes receivable
2. To know the initial and subsequent measurement of notes receivable
3. To know the accounting for interest bearing note receivable
4. To know the accounting for non-interest-bearing note receivable

DEFINITION OF NOTES RECEIVABLES

Notes Receivable are claims supported by formal promises to pay usually in the form of
notes.
- We can claim in a written contract.
- These are written documents. Example: promissory notes.
- Formal: it must be notarized. Once the document is already notarized it will become a
public instrument.
- Public instrument - whatever happens, you can use the promissory note as a grounds in
the courts of justice. May naa-abswelto because may mga notaryo na not still counted
for presuming kase nasuspend yung regarding sa pag file ng kaso sa ganito, but if
malaki yung amount pwede gamitin na grounds for estafa. (but minimal chances of doing
that.
A negotiable promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand or at a fixed determinable future time
a sum certain in money in order or to a bearer.
- May option, dahil it is an unconditional promise. Kung ano ang napagkasunduan yun
lang ang dapat mag prevail. Follow what’s in the contract.

Simply stated, a promissory note is a written contract in which one person, known as the
maker,
promise to pay another person, known as payee, a definite sum of money.
a. Maker/ debtor/ borrower - the one who promises to pay another person.
b. Payee/ creditor/ lender - the one who lends the money.

The maker is obliged to pay in two scenarios:

The note may be payable on demand or at a definite future date.
● Payable on demand - you will be paying anytime. No time frame. No date requirement.
● Definite future date - fixed determinable future time. May napagkasunduan na date na
nakasulat sa promissory note. Depends on the agreement of both parties.
Note: majority of the promissory notes have a date. Why?
- Para malaman kung kailan ang due date. At kung halimbawa due date na pero hindi pa
rin nakapagbayad, para macompute natin yung interest. Since utang, manganganak
yan ng interest.

Account Titles:
Maker Payee

Notes Payable (maker debtor) Notes Receivable (payee creditor)

Interest Expense (maker bayad ng interest) Interest Income (impose the interest)
NOTE: The discussion will focus on the PAYEE

May specific amount of interest or percentage ba na ini-impose?

Before we have anti-usury law - bawal mag impose ng mataas na interest ang mga
creditor sa mga debtor. To protect the interest of the debtors kase kawawa sila huhu.
Example: borrowers of a 5-6 lending scheme pay with an exorbitant (excessive) interest
rate of 20 percent a month.
- People still avail this because there is no document and no collateral.
Before, the maximum interest rate was 6% only, the law is prohibiting all companies
to impose more than 6% interest (anti-usury law).

But, the Philippines used to have an anti-usury law that set a cap on the interest rate on
pans. However, it was suspended in 1983, and efforts to revive the law have
languished in Congress.

CLASSIFICATION OF NOTES RECEIVABLE

SHORT TERM NOTES RECEIVABLE CURRENT ASSETS

LONG TERM NOTES RECEIVABLE NON- CURRENT ASSETS

IF THE PROBLEM IS SILENT CURRENT ASSETS

May possibility po ba na ang notes receivable is hindi mabayaran?

- Tatawagin siyang dishonored notes.

DISHONORED NOTES
When a promissory note matures (due date na) and it is not paid. It is said to be
dishonored. (A promise not fulfilled)

Theoretically, dishonored notes receivable should be removed from the notes receivable
account and transferred to accounts receivable.
The entry will be:
Debit: AR
Credit: NR

The amount to be debited to accounts receivable should include the face amount, interest and
other charges.

Charges fees: dahil hindi nabayaran, may processing fee para mailipat.
- If hindi talaga macollect ang debt magiging Allowance for Bad Debts na siya.

INITIAL AND SUBSEQUENT MEASUREMENT OF NOTES RECEIVABLE

- Fair Value plus transaction costs = FACE VALUE
(Kung magkano mo siya inutang and magkano ang idadagdag na transaction cost in
processing your utang.)
-> Subsequently kapag may binayad na yung debtor, ile-less na yung mga binayad or
payments kung meron man.
-> in Accounts Receivable, Accounts Receivable - Accounts for Doubtful Accounts =
Amortized Cost and the other term is Net Realizable Value.

Types of Notes Receivable Initially Subsequently

(Transaction Date) (FS Date)

Short Term- Interest Bearing Face Value Face Value (Face Value less
payments)
 Short Term- Non- Interest Face Value Face Value (Face Value less
Bearing payments)

Long Term- Interest Bearing Face Value Face Value (Face Value less
payments)

Long Term- Non- Interest Present Value Amortized Cost

Bearing

* Face amount is the amount stated in the promissory note.

- Kung ano yung nakalagay sa contract including the transaction cost.
* Present Value is the discounted value of the future cash flows using the prevailing market
rate of interest for similar notes. (Other term for market rate is imputed rate, yield rate or
effective interest rate) or simply the value today without interest.
- discounted value means mas mababa ang value niya compared sa magiging value niya
in the future.
- Para macompute, gagamit tayo ng rate or percentage. Ang tawag dun is imputed rate,
yield rate or effective interest rate.
- Most common terms used are effective interest rate and nominal rate.
● What if tinanog is imputed rate? Is it effective or nominal? The answer is
EFFECTIVE or simply the value today without the interest..
● Example: pera mo ngayon na dineposito is Php 10,000 and you are expecting na
after one year Php 10,500 na yun.
- Php 10,000 - is the present value (value ng pera ngayon)
- Php 10,500 - is the future value
On the other hand, Present Value is also the current value of the future sum of money.

Others notes to remember:

Interest Bearing Note Non- Interest-Bearing Note

1. Have a stated interest rate, the 1. Non- Interest Bearing is a misnomer

contracted rate stated on the promissory
note. Other terms for stated interest rate
include nominal rate, coupon rate, and
face rate.
- May nakalagay na interest rate sa
promissory note.
Ex: I promise to pay Pedro 20,000 with an
interest rate of 12%.
Principal: 20,000
Percentage: 12%
(misleading term) because all notes
implicitly contain interest. It is simply a
case of the interest being included in the
face amount rather being stated as a
separate rate. They do not have a stated
interest rate because they include the
interest element as part of the face
amount.
- Walang utang na walang interest. May
interest pero nakatago lang. lol
- Non- Interest Bearing kase for
example:
I promise to pay Pedro 20,000
● You will assume na wala
siyang interest but meron.
● Sa 20,000 na yun included na
yung interest.
Example is yung sa appliance center, ang
mga nagpapa credit card nakalagay 0%
interest. Wag maniniwala because sa amount
na yun, nakapaloob na ang interest sa
amount.

2. Principal= Face Amount 2. Separate the principal amount of the from

the face amount of Notes Receivable using
Present Value
- Kung gusto mo malaman kung
magkano ang principal and interest.
 - So, iseseparate natin using the
present value computations.

3. Interest = Principal x % 3. The difference resulted in No. 2 is the

Formula: P x R x T Interest
(The interest is not stated in the note)
Ex: yung 20,000
- Ang na compute mo na principal is
15,000. So ibig sabihin yung 5,000 na
natira will be the interest.

Face of the Promissory Note

- Itchura ng promissory note.

10,000 – PRINCIPAL 10,000

12% - INTEREST
- Automatic yung mismong amount.
(included na yung interest)

* Amortized cost is being used using an effective interest method. (Other methods includes
Straight Line Method and Outstanding Balance Method)
- We use three different methods in notes receivable but yung most common is effective
interest method.
* Amortized cost is the amount at which the notes receivable (fair value + transaction cost =
face value) is measured minus principal repayment (subsequent measurement) plus or
minus accumulative amortization (kumbaga sa depreciation ang tawag sa NR is
amortization) of any difference between the initial carrying amount and the principal maturity
date minus reduction for impairment or uncollectibity. (ito yung halimbawa sa principal
amount may mga items or percentage na hindi na mako-kolekta. Gagamitin yan sa loans
receivable)

ILLUSTRATION 1: (INTEREST BEARING NOTE)

Kim received a 3 year note for P 1,000,000 plus interest of 12% compounded annually.

Compounded means “that any accrued interest receivable also earns interest”
- We call it accrued interest / earns interest / interest on interest.
Compounded - sa next year pag cinompute mo yung interest, kasama na yung principal and
interest from the previous year. Kumbaga, naga accumulate yung interest.
- Banks normally use this method.

Principal: P 1,000,000

First Year Interest (1,000,000 x 12%) = P 120,000 - (to be

carried over in the next year because it is still
not paid.)

Second Year Interest (1,120,000 x 12%) = P 134,400

Third Year Interest (P 1,254,400 x 12%) = P 150,528

CASH TO BE RECEIVED UPON MATURITY = 1,000,000 + 120,000 + 134,400 + 150,528

= P 1,404,928
ILLUSTRATION 2: (NON- INTEREST-BEARING NOTE)

10,000 upon Maturity

3 years

9,700 100 100 100 10,000

(PV) (FV)

ILLUSTRATION 3:

KJ Deposited in a bank on 2020 with an amount of P 100,000. After 3 years, what is its
expected future value.

2020

100,000 1,000 1,000 1,000 103,000

ILLUSTRATION 4:

Jung extended credit to Seyun which will yield after 3 years to P 200,000, what will be its
present value.

Using the Present Value of 1 @ 3 years = 0.7513.

2020

105,260 49,740 200,000

(PV) Interest Income (FV)

>> To get the PRESENT VALUE simply multiply 200,000 multiplied by 0.7513 = 105,260