Notes Receivable

Notes Receivables

A formal claim against another that is evidenced by a written promise, called promissory note, or a
written order to pay at a later date, called time draft.
- Promissory note is an unconditional written agreement to pay to bearer or to the order of the
payee a certain sum of money on a specific or determinable date.
- Time draft is a written order (made by the drawer), addressed to the drawee to pay a certain
sum of money on a specific or determinable date.
 Initial Recognition

Following IFRS 9, a note receivable is initially recognized when the entity becomes a party to
the contractual provision of the instrument, that is when the entity becomes the payee of the
note issued by the maker. A note is initially recognized at the transaction price based on the
circumstance that gives to the receipt of the note, which is any of the following:
a. The amount of cash given up in exchange for the note;
b. The fair value of the non-cash consideration given up in exchange for the note, or if
such fair value cannot be practically determined, the fair value of the note received,
which is the discounted cash flow of future collections, based on the implicit interest
rate.
 Types of Notes Receivable

• Interest bearing - The fair value of an interest-bearing note is generally its face value,
unless it is clear that the interest rate stated in the note does not reflect a realistic
interest rate.
a. With Realistic interest rates – When a note has a stated rate the
approximates the prevailing market rate for similar notes.
b. With Unrealistic interest rates – When a note bears an interest rate that is
significantly different from prevailing interest rate for similar notes, or when the face
value of the note is significantly different from the market value of the consideration
given up in exchange for the note.

• Non-interest bearing or zero-interest bearing

Key takeaways:

- The computations of interest is based on 360-day year.

- To qualify for reporting as Notes Receivable, the note must be negotiable; it must be payable to the
bearer and must not yet due. Dishonored note receivable does not qualify to be reported as Notes
Receivable in the statement of financial position.
- Overdue notes from customers, together with accrued interest thereon, are generally reclassified as
accounts receivable.
- When a note makes no provision for interest, it is said to be non-interest bearing note or zero-interest
bearing.
- A non-interest bearing note does not necessarily mean that there is no interest accruing on the
receivable. The promissory note simply written in a form where the face value already includes an
imputed interest for the term of the note.
 Summary of measurement of Notes Receivable

Short term = Face value/Transaction price

Long Term:
Interest bearing:
Realistic/Market rate = Face value/Transaction Price
Unrealistic/Not a market rate:
1) Cash Price
2) If no cash price available, use PV of cash flows discounted using prevailing IR

Non-interest bearing:
1) Cash Price
2) If no cash price available, use PV of cash flows discounted using prevailing IR
- The difference between the face amount of the note and its present value is recorded as discount or
premium.
- The excess of the face value of the note over its present value is credited to Discount on Notes
Receivable. Face value > Present value = Discount on Notes Receivable.
- The excess of the present value of the note over its face value is debited to Premium on Notes
Receivable. Face value < Present value = Premium on Notes Receivable.
- The discount or premium is amortized to interest revenue over the term of the note using effective
interest method.
- Any unamortized discount is deducted from the ledger balance of the Notes Receivable, and any
unamortized premium is added to the balance of the Notes Receivable, to arrive at the amortized
cost to be presented in the Statement of financial position.
 Illustrative Problem: Short-term Interest Bearing Notes

Feb. 5 Received a 60-day, 10%, P30,000 promissory note from A Company from merchandise sold.
Apr. 4 Collected from A Company in settlement of its note dated January 5.
Apr. 10 Received a 30-day, 12%, P25,000 promissory note from B Company in settlement of an overdue
account.
May 6 Received a 120-day, 12%, P45,000 promissory note from C Company in settlement of an
account.
May 9 B company dishonored its note on maturity date
May 30 Collected the amount due from B Company on account of its overdue note. An additional
charge for interest at 12% on maturity value from maturity date is also collected.
June 30 Fiscal year-end adjustments are made.
The following are the journal entries for the given transactions:

Feb. 5 Notes Receivable 30,000

Sales 30,000

Apr. 4 Cash 30,500

Notes Receivable 30,000
Interest Revenue 500
(30,000 x 10% x 60/360 = 500)

Apr. 10 Notes Receivable 25,000

Accounts Receivable 25,000

May 6 Notes Receivable 35,000

Accounts Receivable 35,000
May 9 Accounts Receivable 25,250
Notes Receivable 25,000
Interest Revenue 250
(25,000 x 12% x 30/360 = 250)

May 30 Cash 25,426.75

Accounts Receivable 25,250
Interest Revenue 176.75
(25,250 x 12% x 21/360 = 176.75)

June 30 Interest Receivable 825

Interest Revenue 825
(45,000 x 12% x 55/360)
Illustrative Problem: Long-term Interest-Bearing Note with
Realistic Interest Rate, one-time payment of Principal
On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated
depreciation of P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The
10% interest rate is a realistic rate of interest for a note of this type.

Journal entries:
Jan. 1, 2020 Notes Receivable 100,000
Accumulated Depreciation 350,000
Loss on Sale 50,000
Machinery 500,000
To record the sale transaction
To compute the loss on sale:
Net selling price 100,000
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (50,000)

Dec. 31, 2020 Cash 10,000

Interest Revenue 10,000
(100,000 x 10% = 10,000)
To record the interest due in 2020

Dec. 31, 2021 Cash 10,000

Interest Revenue 10,000
(100,000 x 10% = 10,000)
To record the interest due in 2021
Dec. 31, 2022 Cash 10,000
Interest Revenue 10,000
(100,000 x 10% = 10,000)
To record the interest due in 2022

Dec. 31, 2023 Cash 10,000

Notes Receivable 100,000
Interest Revenue 10,000
To record the collection of note and interest due in 2023
Statement of Financial Position are presented below as follows at the end of each year:

Notes Receivable is treated as current asset if the Notes Receivable becomes collectible within
one year from the reporting date. Thus, on December 31, 2022 Notes Receivable is treated as
current assets.
 Illustrative example: Long-term Interest-Bearing Note with
Unrealistic Interest Rate (Stated rate is lower than Market rate of
interest), one-time payment of Principal
• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of
P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The prevailing rate of
interest for a note of this type is 16%.

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (100,000 x .5523) 55,230
Add: Present value of interest
(100,000 x 10% x 2.7982) 27,982 83,212
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (66,788)
Journal entries:
Jan. 1, 2020 Notes Receivable 100,000
Accumulated Depreciation 350,000
Loss on Sale 66,788
Machinery 500,000
Discount on Notes Receivable 16,788
To record the sale transaction

Dec. 31, 2020 Cash 10,000

Discount on Notes Receivable 3,314
Interest Revenue 13,314
To record the interest due in 2020 and amortization of discount on notes receivable
Dec. 31, 2021 Cash 10,000
Discount on Notes Receivable 3,844
Interest Revenue 13,844
To record the interest due in 2021 and amortization of discount on notes receivable

Dec. 31, 2022 Cash 10,000

Discount on Notes Receivable 4,459
Interest Revenue 14,459
To record the interest due in 2022 and amortization of discount on notes receivable

Dec. 31, 2023 Cash 110,000

Discount on Notes Receivable 5,171
Interest Revenue 15,171
Notes Receivable 100,0000
To record the collection of note and interest due in 2023 and amortization of discount
on notes receivable
Statement of Financial Position are presented below as follows at the end of each year:

Notes Receivable is treated as current asset if the Notes Receivable becomes collectible within
one year from the reporting date. Thus, on December 31, 2022 Notes Receivable is treated as
current assets net of Discount on Notes Payable.
 Illustrative example: Long-term Interest-Bearing Note with
Unrealistic Interest Rate (Stated rate is higher than Market rate of
interest), one-time payment of Principal
• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of
P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The prevailing rate of
interest for a note of this type is 8%.

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (100,000 x .7350) 73,500
Add: Present value of interest
(100,000 x 10% x 3.3121) 33,121 106,621
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (43,379)
Journal entries:
Jan. 1, 2020 Notes Receivable 100,000
Accumulated Depreciation 350,000
Loss on Sale 43,379
Premium on Notes Receivable 6,621
Machinery 500,000
To record the sale transaction

Dec. 31, 2020 Cash 10,000

Premium on Notes Receivable 1,470
Interest Revenue 8,530
To record the interest due in 2020 and amortization of Premium on notes receivable
Dec. 31, 2021 Cash 10,000
Premium on Notes Receivable 1,588
Interest Revenue 8,412
To record the interest due in 2021 and amortization of premium on notes receivable

Dec. 31, 2022 Cash 10,000

Premium on Notes Receivable 1,715
Interest Revenue 8,285
To record the interest due in 2022 and amortization of premium on notes receivable

Dec. 31, 2023 Cash 110,000

Premium on Notes Receivable 1,848
Interest Revenue 8,148
Notes Receivable 100,000
To record the collection of note and interest due in 2023 and amortization of premium
on notes receivable
Statement of Financial Position are presented below as follows at the end of each year:

Notes Receivable is treated as current asset if the Notes Receivable becomes collectible within
one year from the reporting date. Thus, on December 31, 2022 Notes Receivable is treated as
current assets including of Premium on Notes Payable.
Illustrative example: Long-term Interest-Bearing Note with Unrealistic Interest Rate
(Stated rate is lower than Market rate of interest), Interest is payable Semi-Annually,
One-time Collection of Principal.

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of P350,000 as
of January 1,2020. The company receives 4-year, P100,000, 10% note. The note requires interest to be paid semi-
annually every June 30 and December 31. The prevailing rate of interest for a note of this type is 16%.

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (100,000 x .5430) 54,030
Add: Present value of interest
(100,000 x 5% x 5.7466) 28,733 82,763
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (67,237)
Journal entries:
Jan. 1, 2020 Notes Receivable 100,000
Accumulated Depreciation 350,000
Loss on Sale 67,237
Machinery 500,000
Discount on Notes Receivable 17,237
To record the sale transaction

Jun. 30, 2020 Cash 5,000

Discount on Notes Receivable 1,621
Interest Revenue 6,621

Dec. 31, 2020 Cash 5,000

Discount on Notes Receivable 1,751
Interest Revenue 6,751
To record the interest due in 2020 and amortization of discount on notes receivable
Jun. 30, 2021 Cash 5,000
Discount on Notes Receivable 1,891
Interest Revenue 6,891

Dec. 31, 2021 Cash 5,000

Discount on Notes Receivable 2,042
Interest Revenue 7,042
To record the interest due in 2021 and amortization of discount on notes receivable

Jun. 30, 2022 Cash 5,000

Discount on Notes Receivable 2,205
Interest Revenue 7,205

Dec. 31, 2022 Cash 5,000

Discount on Notes Receivable 2,382
Interest Revenue 7,382
To record the interest due in 2022 and amortization of discount on notes receivable
Jun. 30, 2023 Cash 5,000
Discount on Notes Receivable 2,572
Interest Revenue 7,572
To record the interest due in 2023 and amortization of discount on notes
receivable

Dec. 31, 2023 Cash 105,000

Discount on Notes Receivable 2,773
Interest Revenue 7,773
Notes Receivable 100,000
To record the collection of note and interest due in 2023 and amortization of discount
on notes receivable
Statement of Financial Position are presented below as follows at the end of each year:

Notes Receivable is treated as current asset if the Notes Receivable becomes collectible within one year
from the reporting date. Thus, on December 31, 2022 Notes Receivable is treated as current assets net
of Discount on Notes Payable.
Illustrative example: Long-term Interest-Bearing Note with Unrealistic Interest Rate
(Stated rate is lower than Market rate of interest), Uniform collection of Principal

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of P350,000 as
of January 1,2020. The company receives 4-year, P100,000, 10% note. The note requires interest to be paid annually on
December 31. The prevailing rate of interest for a note of this type is 16% and the principal amount of the note is to be
paid in four equal annual installments of P25,000 every December 31.

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (25,000 x 2.7982) 69,955
Add: Present value of interest** 18,778 88,732
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (61,267)
Journal entries:
Jan. 1, 2020 Notes Receivable 100,000
Accumulated Depreciation 350,000
Loss on Sale 61,267
Machinery 500,000
Discount on Notes Receivable 11,267
To record the sale transaction

Dec. 31, 2020 Cash 35,000

Discount on Notes Receivable 4,197
Interest Revenue 14,194
Notes Receivable 25,000
To record the collection of note and interest due in 2020 and amortization of discount
on notes receivable
Dec. 31, 2021 Cash 32,500
Discount on Notes Receivable 3,369
Interest Revenue 10,869
Notes Receivable 25,000
To record the collection of note and interest due in 2021 and amortization of discount on
notes receivable

Dec. 31, 2022 Cash 30,000

Discount on Notes Receivable 2,408
Interest Revenue 7,408
Notes Receivable 25,000
To record the collection of note and interest due in 2022 and amortization of discount on
notes receivable
Dec. 31, 2023 Cash 27,500
Discount on Notes Receivable 1,293
Interest Revenue 3,793
Notes Receivable 25,000
To record the collection of note and interest due in 2023 and amortization of discount
on notes receivable
Statement of Financial Position are presented below as follows at the end of each year:

Based on the amortization table, the amount of the principal (and accrued interest, if any) that is due
within twelve months from the end of the reporting period is classified as current asset, and the
remainder is classified as non-current.
Illustrative example: Long-term Non-interest-Bearing
Note, One time collection of Principal
• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of P150,000 as
of January 1,2020. The company receives 5-year, P500,000 note. The note is a non-interest bearing note and the
prevailing rate of interest for a note of this type is 10%

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (500,000 x .6209) 310,450
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale (39,550)
Journal entries:
Jan. 1, 2020 Notes Receivable 500,000
Accumulated Depreciation 150,000
Loss on Sale 39,550
Machinery 500,000
Discount on Notes Receivable 189,550
To record the sale transaction

Dec. 31, 2020 Discount on Notes Receivable 31,045

Interest Revenue 31,045
To record amortization of Discount on Notes Receivable in 2020
Dec. 31, 2021 Discount on Notes Receivable 34,150
Interest Revenue 34,150
To record amortization of Discount on Notes Receivable in 2021

Dec. 31, 2022 Discount on Notes Receivable 37,564

Interest Revenue 37,564
To record amortization of Discount on Notes Receivable in 2022

Dec. 31, 2023 Discount on Notes Receivable 41,321

Interest Revenue 41,321
To record amortization of Discount on Notes Receivable in 2023
Dec. 31, 2024 Cash 500,000
Discount on Notes Receivable 45,470
Interest Revenue 45,470
Notes Receivable 500,000
To record the collection of note and interest due in 2024 and amortization of discount
on notes receivable
Statement of Financial Position are presented below as follows at the end of each year:

On December 31, 2023, which is the maturity date of the note, the remaining balance of discount on
notes receivable is transferred to interest revenue simultaneous to the collection of the principal
amount.
Illustrative example: Long-term Non-interest-Bearing Note
Uniform collection of Principal
• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of P150,000 as
of January 1,2020. The company receives 3-year, P600,000 note. The note is a non-interest bearing note and the
prevailing rate of interest for a note of this type is 14% and the principal amount of the note is to be paid in the three
equal annual installments of P200,000 every December 31.

To compute present value of the note and the gain or loss on sale:
Net selling price (Present value of the note):
Present value of principal (200,000 x 2.3216) 464,320
Less: Carrying amount of machinery
Cost 500,000
Less: Accum. Depn 350,000 150,000
Loss on sale 114,320
Journal entries:
Jan. 1, 2020 Notes Receivable 600,000
Accumulated Depreciation 150,000
Gain on Sale 114,320
Machinery 500,000
Discount on Notes Receivable 135,680
To record the sale transaction

Dec. 31, 2020 Discount on Notes Receivable 65,005

Cash 200,000
Interest Revenue 65,005
Notes Receivable 200,000
To record amortization of Discount on Notes Receivable in 2020
Dec. 31, 2021 Discount on Notes Receivable 46,105
Cash 200,000
Interest Revenue 46,105
Notes Receivable 200,000
To record amortization of Discount on Notes Receivable in 2020

Dec. 31, 2022 Discount on Notes Receivable 24,569

Cash 200,000
Interest Revenue 25,569
Notes Receivable 200,000
To record amortization of Discount on Notes Receivable in 2020
Statement of Financial Position are presented below as follows at the end of each year:

Based on the amortization table, the amount of the principal (and accrued interest, if any) that is due
within twelve months from the end of the reporting period is classified as current asset, and the remainder
is classified as non-current.