INTEREST BEARING NOTE – INSTALLMENT PAYMENT

Problem:

Alpha received a note from Poochie on January 1, 2020 amounting to P435,000 for the sale of
goods. The note is collectible in 3 equal annual instalments every December 31, and bears a 12%
interest rate.

ENTRIES:

2020
1/1 Notes receivable 435,000
Sales 435,000

12/31 Cash 197,200

Notes receivable (435,000/3) 145,000
Interest Income (435,000 x 12%) 52,200

2021
12/31 Cash 179,800
Notes receivable (435,000/3) 145,000
Interest Income (290,000 x 12%) 34,800

2022
12/31 Cash 162,400
Notes receivable (435,000/3) 145,000
Interest Income (145,000 x 12%) 17,400

NON INTEREST BEARING NOTE (Long term)

Rule: Initially recorded at its present value.

Computation of present value:

a) If there a cash sales price

Present value = cash sales price

Face value of the note Pxx

Less: Cash sales price xx
Unearned interest income Pxx

b) No cash sales price – installment

Present value = Installment payment x PVF of an annuity of 1

Face value of the note Pxx

Less: PV of note xx
 Unearned interest income Pxx

c) No cash sales price –lump sum

Present value = Face value of note x PVF of 1

Face value of the note Pxx

Less: PV of note xx
Unearned interest income Pxx

ILLUSTRATIVE PROBLEM:

P51, 310

1 2 3

NO CASH PRICE – INSTALLMENT

12/31/19 12/31/20
Notes Receivable P200,000 P100,000
Less: Unearned interest income (51,310-24,869) 26,441 (26,441-17,356) 9,085
Book value (present value) P173,559 P90,915

NO CASH PRICE – LUMPSUM

12/31/19 12/31/20
Notes Receivable P400,000 P400,000
Less: Unearned interest income (99,480-30,052) 69,428 (69,428-33,057) 36,371
Book value (present value) P330,572 P363,629