NOTES RECEIVABLE

Initial Recognition (In theory)

Short-term

@ FV 1st: Cash Price Equivalent, if given

Long-term 2nd: PV of Future Cash Flows

Face Value x PV of 1 using effective rate

Stated Interest x PV of OA using effective rate

PV of Notes Receivable

Subsequent Measurement (B/S)

In Theory @ Amortized Cost (AC) both ST & LT

In Problem In short term, since Discount/Premium is immaterial, they are presented in B/S @ Face Value.

Interest Income

PV x Effective Rate

Interest Receivable

Face x Stated Rate

Critical Points:

1. FV vs PV
2. Current N/R vs Noncurrent N/R

Current = Amortization in next year

___ Effective – Stated

___ Principal repayment – Effective

Non-current = AC in next year

3. Table of amortization of notes

a. Interest bearing nots
Date Effective rate Stated rate Amortization Amortized Cost

b. Non-interest bearing note

Date Effective rate Amortization Amortized Cost
 In payment for Inventory - CREDIT SALES
(ordinary course of business)

Transaction Date:
A. If with CASH + N/R
1st: Look for the Cash Selling Price(FV) 2nd: To set-up COS 3rd: To compute for GP

Cash Selling Price COS xx Sales(@Cash SP) xx

Inventory xx COS xx
Cash PV of N/R GP xx
± UII
N/R @ face

Entry:
If Discount If Premium

Cash xx Cash xx
N/R xx N/R xx
Receipt of Sales(@cash SP) xx UII xx
UII xx Sales(@cash SP) xx
N/R
Year-end Date:
A. To recognize Interest Income
Effective > Stated Effective < Stated

Cash(face x stated) xx Cash xx

UII xx Interest Income xx
Interest Income(PV x eff) xx UII xx

In payment for PPE - Close the PPE account

(incidental transaction)

Transaction Date:
A. If with CASH + N/R
1st: Look for the cash selling price (FV) 2nd: To recognize gain on sale of equipment

Cash Selling Price Cash Selling Price - CV of Equipment = G/L

Cash PV of N/R Cash PV of N/R

± UII ± UII
N/R @ face N/R @ face

Entry:
If Discount If Premium
Cash xx Cash xx
N/R xx N/R xx
Allow. For Dep’n. xx Allow. For Dep’n. xx
Machinery xx UII xx
UII xx Machinery xx
Gain on sale xx Gain on sale xx
Exercises:
1. Your company receives a P10,000, 4-year, 2% annual interest note, paid annually. The market rate of interest is
8%.

Q: What is the initial recognition of notes receivable?

Q: What is the journal entry to record the receipt of notes?

2. Your company receives a P10,000, 4-year, 2% annual interest note, paid semi-annually. The market rate of
interest is 8%.

Q: What is the initial recognition of notes receivable?

Q: What is the journal entry to record the receipt of notes?
3. On January 1, 2023, Company A sold its products to Company C and received a note with P200,000 face amount,
10% annual stated interest rate, and due on December 31, 2024. Interest is paid annually on December 31, each
year. At the time of issuance, market interest rate is 12%.
Q: What is the present value of the notes receivable?
Q: Complete the table:

4. On January 1, 2023, Company A sold its products to Company B and received a non-interest bearing note with
P200,000 face amount and due on December 31, 2024. At the time of issuance, market interest rate is 12%.

Q: What is the present value of the note receivable?

Q: Complete the table:

5. On January 31, 2023, Shelly Corp. made sale of an item of machinery held for sale in the ordinary course of
business

REGULAR SALE of MACHINERY Consideration received:

CV in the books P100,000 Up-front payment P50,000
Total Selling Price 250,000 Note, due in 3 yrs. @ 8%
Cash Selling Price 230,789 annually on Dec. 31 200,000

Prevailing rate in the market for a note of this type is 12%

Q: Entry for date of transaction(Sales & COS)

Q: Entry to recognize the interest income?
Q: Measurement of note January 31, 2023?
Q: Measurement of note December 31, 2023?

6. On January 1, 2023, Karla Corp. made a disposal of an old machinery

SALE OF OLD MACHINERY Consideration received:

Historical Cost P500,000 Up-front payment P50,000
Accum. Dep’n 400,000 Note, non-interest bearing,
Total Selling price 250,000 due in 3 years 200,000

Prevailing rate in the market for a note of this type is 12%

PV of 1 @ 12% for 3 years is 0.7118

Q: Entry for date of transaction

Q: Gain on Sale?
Q: Entry to recognize the interest income
Q: Measurement of note on January 1, 2023?
Q: Measurement of note on December 31, 2023?