Module 1 Notes and Loans Receivable

AE 121
COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. Apply the Philippine Generally
Accepted Accounting Principles
(GAAP) related to notes & loans
receivables, inventory, investments,
property, plant, and equipment,
and intangible assets.
2. Promote the Louisian core values in
practicing financial accounting and
reporting.
INTERMEDIATE
ACCOUNTING I
Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 1
There are no secrets to success. It is the
result of preparation, hardwork, and
learning from failure. – Colin Powell
COURSE INTRODUCTION
The course covers the detailed discussion, appreciation, and application of accounting
principles and standards relative to recognition, measurement and valuation, and financial
statement presentation and disclosure requirements of all assets, financial and non-
financial. Emphasis is given on the interpretation and application of theories of accounting
in relation to notes & loans receivables, inventories, short and long-term investments,
prepayments, property, plant and equipment, wasting assets, intangible assets, and
research and development cost. The related internal control, ethical issues, and
management of assets are also covered.
Unit 1: Notes and Loans Receivables
VALUATION OF NOTES RECEIVABLES
Notes Receivables shall be primarily measured at its present value. Present Value is the sum
of all future cash flows discounted using the prevailing interest rate, which is usually the
effective interest rate for similar notes.
In cases where the notes receivable is due on a short-term basis, less than 12 months, it shall
be measured at its face value. Short term notes receivables are no longer discounted, due
to that fact that the effect of the discounting is immaterial to the notes value.
ILLUSTRATION: Interest Bearing Note – Short term
On January 1, Aruba Bungee Cords (ABC) sold a number of bungee cords to Arizona
Highfliers for P 15,000. Arizona issued a note payable to ABC for P 15,000, at an interest rate
of 10%, and with payment of P 5,000 due at the end of the month for three months starting
January 31.
The entry to record the sale and receipt of note on January 1 is:
Notes Receivable 15,000
Sales 15,000
After the first month, the entry to record the receipt of the payments are as follows:
January 31 Cash 5,125
Interest Income (15,000x10%x1/12) 125
February 28 Cash 5,083

March 31
Cash 5,042
Observe that the since there are periodic payments of principal, interest is also declining
based on the unpaid balance.
For long term notes receivable, valuation will depend on whether the note is interest bearing
or non-interest bearing. Interest bearing notes receivables shall be measured at its face value
while, Non-interest-bearing notes receivables are measured at its present value.
After recording the notes receivable at its corresponding initial value, notes receivables
should be measured at its amortized cost using the effective interest method.
Amortized cost is the initial amount which a note receivable is measured minus any principal
payments, plus or minus any aggregate amortization of any difference between the initial
carrying amount and the maturity value minus allowances for impairment or uncollectibility.
To illustrate the concept of amortization, the following illustrations may be followed.
ILLUSTRATION: Interest Bearing Note – Long term
On January 1, 2020 Freewill Incorporated sold a machine costing P 400,000 to Grutee

Company for P 500,000. The company received a 3-year note bearing an interest of 10% per
annum payable on maturity date.
The following are the entries for the said transaction:
Jan 1, 2020 Notes Receivable 500,000

Machinery 400,000
Gain on Sale 100,000
Dec 31, 2020 Accrued Interest Receivable 50,000

Interest Income 50,000
(P 500,000 x 10%)

(P 500,000 x 10%)

(P 500,000 x 10%)
Jan 1, 2023 Cash 650,000

Accrued Interest Receivable 150,000
Face Value P 500,000

Accrued Interest
Year 1 P 50,000
Year 2 50,000
Year 3 50,000 150,000
Total Cash Received P 650,000
Assuming the same illustration, but interest becomes compounded annually. When interest
is compounded, this means that any accrued interest shall also earn interest in the next years.
The following are the entries for 2021 – 2023:
(P 550,000 x 10%)

(P 605,000 x 10%)
Jan 1, 2023 Cash 665,500


Accrued Interest
Year 1 (500,000 x 10%) P 50,000
Year 2 (550,000 x 10%) 55,000
Year 3 (605,000 x 10%) 60,500 165,500
Total Cash Received P 665,500
ILLUSTRATION: Non-Interest-Bearing Note – Long Term (Outstanding Method of Amortization)
ABC Co. sells equipment on installment basis. On January 1, 2020, the entity sold an
equipment costing P 500,000 for P800,000. The buyer issued a non-interest-bearing note for P
800,000 payable in four equal instalments every December 31. The equipment’s cash price
is P 600,000.

Present Value – Cash Sales Price 600,000
Unearned Interest Income P 200,000
Cash Sales Price P 600,000

Cost of Equipment 500,000
Gross Income P 100,000
The following are the entries for 2020:
To record the Sale on January 1, 2020:

Sales 600,000
Unearned Interest Income 200,000
To record collection of first installment payment on December 31, 2020:
Cash 200,000
To transfer unearned interest income to interest income over the term of the note on
December 31, 2020:

Year Notes Fraction Interest

Receivable Income
2020 800,000 8/20 80,000
2021 600,000 6/20 60,000
2022 400,000 4/20 40,000
2023 200,000 2/20 20,000
2,000,000 200,000
The first installment received on December 31, 2020 will decrease the value of the notes
outstanding, thus notes receivable decreases by P200,000 each year.
To be able to get the amount of interest income to be recognized each year, fractions are
developed from the notes receivable balance each year. The fractions developed will then
be multiplied by total unearned interest income to get the interest income for the year.
In the Statement of Financial Position on December 31, 2020 the Notes Receivable will then
be presented partly current and non-current, since payments are scheduled annually.
Current
Notes Receivable - Current P 200,000
Less: Amortization of Interest 60,000
Carrying Amount P 140,000
Non-Current
Notes Receivable – Non-Current P 400,000
Less: Unearned Interest Income 60,000
The Unearned Interest Income will now have a balance of:
Total unearned Interest Income P 200,000

Realized 2020 80,000
Total Unearned Interest Income P 120,000
ILLUSTRATION: Non-Interest-Bearing Note – Long Term (Effective Method of Amortization)
On January 1, 2020, ALPHA Corporation sold a machine costing P 400,000 for P 600,000. The
buyer paid a down of P 150,000 and issued a non-interest-bearing note for P 450,000 payable
for 3 years in equal annual instalments payable every December 31.
The prevailing interest rate for a note of this type is 10%. The present value factor for an
ordinary annuity of 1 for three periods at 10% is 2.4869.
To be able to arrive at the present value, the annual installment payments of P 150,000 will
then be multiplied to the present value factor of 2.4869 for a total present value of P 373,035.
The following are now the computations for the Unearned Interest Income and Gain on Sale:

Present Value of Notes Receivable 373,035
Down Payment P 150,000

Present Value of Note Receivable 373,035
Sales Price P 523,035
Cost of Machine 400,000
Gain on Sale of Machine P 123,035
To record the sale on January 1, 2020:
Cash 150,000
Machinery 400,000
Gain on Sale of Machine 123,035
To record collection of first installment payment on December 31, 2020:
Cash 150,000
To transfer unearned interest income to interest income over the term of the note on
December 31, 2020:

For this case, the computation of the interest income is now made through effective interest
method.
Date Annual Interest Principal Present

Collection Income Value
Jan. 1, 2020 373,035
Dec. 31, 2020 150,000 37,304 112,696 260,339
Dec. 31, 2021 150,000 26,034 123,966 136,373
Dec. 31, 2022 150,000 13,627 136,373 -
The interest income is computed by multiplying the present value by the interest rate of 10%.
Therefore, in 2020 multiplying P 373,035 X 10% for an interest income of P37,304.
To arrive at the principal payment, annual collection minus payment applicable to interest
income. Thus, in 2020 P 150,000 minus P 37,304 to arrive at P 112,696.
The present value balance will now then be decreased by the applicable principal
payment. So, in 2020 from the beginning balance of P 373,035 minus P 112, 696 (the principal
payment) equals P 260,339 the carrying amount of the note as of December 31, 2020.
ILLUSTRATION: Non- Interest-Bearing Note – Long Term (Lump Sum Payment)
On January 1, 2020, DEF Corporation sold an equipment costing P 800,000 with an

accumulated depreciation of P 400,000. The entity received cash amounting to P 200,000
and a P 300,000 non-interest-bearing note due January 1, 2023.
The prevailing rate of interest for a note of this type is 10% the present value of 1 at 10% for 3
years is 0.7513.
Consider that the note has no periodic payments thus becoming collectible on a lump sum
basis after 3 years.
The following are now the computations for the Unearned Interest Income and Gain on Sale:

Present Value (300,000 x 0.7513) 225,390
Down Payment P 200,000

Present Value of Note Receivable 225,390
Sales Price P 425,390
Carrying Amount of Equipment
(800,000-400,000) 400,000
Gain on Sale of Equipment P 25,390
To record the sale on January 1, 2020:
Cash 200,000
Accumulated Depreciation 400,000
Machinery 800,000
Gain on Sale of Machine 25,390
To transfer unearned interest income to interest income over the term of the note:
Dec 31, 2020 Unearned Interest Income 22,539



To record payment on January 1, 2023:
Cash 300,000
For this case, the computation of the interest income is still made through effective interest
method.
Date Interest Unearned Interest Present

Income Income Value
Jan. 1, 2020 74,610 225,390
Dec. 31, 2020 22,539 52,071 247,929
Dec. 31, 2021 24,793 27,278 272,722
Dec. 31, 2022 27,278 - 300,000
The interest income is computed by multiplying the present value by the interest rate of 10%.
Therefore, in 2020 multiplying P 225,390 X 10% for an interest income of P 22, 539.
To arrive at the unearned interest income simply deduct the interest income for the current
year to the balance of the unearned interest income. So, in 2020 P 74,610 minus P 22,539 to
arrive at P 52,071
The present value now will then be increased by the interest income for the current year.
Thus, P 225,390 plus P 22, 539 equals P 247,929.
The goal of this kind of amortization on a lump sum basis is to bring the present value of the
notes receivable at exactly the same as of its face amount.
LOANS RECEIVABLES
Loans Receivable is a financial asset similar to accounts receivable but is specific to loans
given to an individual or company. The lender could be a bank, financial institutions and
private investors to individuals.
The term of the loan may vary from being short term (less than 12 months) or more often than
that on a long-term basis which covers a period of more than one year.
VALUATION OF LOANS RECEIVABLES
Initially, an entity must measure a loan receivable at fair value plus any transaction costs that
are directly attributable to the issuance of the loan.
The fair value of the loan receivable at initial recognition is the transaction price or the
amount of loan that is actually granted. On the other hand, transaction costs are directly
attributable costs to the loan receivable which may include direct origination costs.
According to PFRS 9, if an entity manages its financial assets in a way to collect contractual
cash flows on specified dates and the contractual cash flows are solely payments of
principal and interest, such financial assets must be measured at amortized cost. Therefore,
loans receivables are measured at amortized cost using effective interest method.
Amortized cost is the initial amount which a note receivable is measured minus any principal
payments, plus or minus any aggregate amortization of any difference between the initial
carrying amount and the maturity value minus allowances for impairment or uncollectibility.
If initial amount recognized is lower than the principal amount, then the amortization of the
difference is added to the carrying amount and vice versa.
Origination Costs
Usually lending activities come first before the actual disbursement of funds and generally
include efforts to identify and attract potential borrowers and to originate a loan.
Fees charged by the bank/lender against the borrower for the creation of the loan are
known as origination fees. These origination fees include payment for activities such as
assessing of borrower’s financial condition, guarantees, collaterals and other security,
negotiation, preparation and processing of payments and closing of loan transactions.
On initial measurement of the loan receivable, direct origination costs should be included
as part of the value of the loan. However, indirect origination costs should be considered as
an outright expense.
If origination fees are received from the borrower, they are recognized as unearned interest
income and amortized over the term of the loan. However, if the origination fees are not
chargeable against the borrower, the fees are known as direct origination costs.
Direct origination costs are deferred and also amortized over the term of the note however,
if possible direct origination costs are offset directly against any unearned origination fees
received.
For that reason, the origination fees received and the direct origination costs are included
in the measurement of the loan receivable.
If the origination fee received is greater than the origination costs, the difference is unearned
interest income and the amortization will increase interest income. On the other hand, in the
origination costs is greater than the origination fees received, the difference is charged to
direct origination costs and amortization will decrease interest income.
ILLUSTRATION: Origination fees
Universal Bank granted a loan to a borrower on January 1, 2020, the interest on the loan is
12% payable annually starting December 31, 2020. The loan has a term of three years. The
loan has the following data:
Principal Amount P 3,000,000

Direct Origination Costs incurred 100,000
Origination fees received from the borrower 378,400
The initial carrying amount of the loan is computed as follows:
Principal Amount P 3,000,000

Origination fees received (239,080)
Direct Origination Costs Incurred 100,000
Initial Carrying amount of the Loan P 2,860,920
The following are the entries to record the loan on January 1, 2020:
To record the loan:
Loans Receivable 3,000,000

Cash 3,000,000
To record the receipt of origination fees received from the borrower:
Cash 239,080
Unearned Interest income 239,080
To record the direct origination costs incurred by the bank:

Cash 100,000
As a result of these entries, the unearned interest income has a credit balance of P 139,080
to be amortized using effective interest method over the term of the loan.
Due to the origination fees received and the direct origination costs, a new effective rate
must be computed through interpolation or “trial and error”. Since the initial carrying amount
of the loan receivable of P 2,860,920 is lower than the principal amount, it means that there
is a discount and therefore the effective rate must be higher than the nominal rate of 12%.
The effective rate is the rate where in the present value of the future cash inflows are equal
to the initial carrying amount of the loan receivable.
Using an effective rate of 13%, the present value of 1 for three periods is .693, and the present
value of an ordinary annuity of 1 for three periods is 2.361. Accordingly, the present value is
computed as follows:
Present Value of Principal (3,000,000 x 0.693) P 2,079,000

Present Value of Interest (360,000 x 2.361) 849,960
Total Present Value P 2,928,960
Based on the tabulated computation at a rate of 13%, the present value is at P 2,928,360
which is higher that the initial carrying amount of P 2,860,920. This means that the effective
interest rate must be higher than 13%.
Using now an effective rate of 14%, the present value for 1 for three periods is 0.675 and the
present value for an ordinary annuity of 1 for three periods is 2.322. The present Value is
computed as follows:
Present Value of Principal (3,000,000 x .675) P 2,025,000

Present Value of Interest (360,000 x 2.322) 835,920
Total Present Value P 2,860,920
Through various computations, the initial carrying amount now of P 2,860,920 is the same as
the present value, thus concluding now that the effective interest is 14%.
With the effective interest method, the amortization of unearned interest income is as follows:
Date Interest Interest Amortization Carrying

Received Income Amount
Jan. 1, 2020 2,860,920
Dec. 31, 2020 360,000 400,529 40,529 2,901,449
Dec. 31, 2021 360,000 406,203 46,203 2,947,652
Dec. 31, 2022 360,000 412,348 52,348 3,000,000
Interest received = Principal X Nominal Rate
Interest income = Carrying amount X Effective Rate
The entries on December 31, 2020 are as follows:

Cash 360,000

In the Statement of Financial Position as of December 31, 2020, the loans receivable will be
presented as follows:
Loan Receivable P 3,000,000

Less: Unearned Interest Income (139,080 – 40,529) 98,551
Carrying Amount, December 31, 200a P 2,901,449
This presentation is in accordance with the standard requiring loans receivables to be

measured at amortized cost which is now the loan’s carrying amount.
Cash 360,000

Cash 360,000

Cash 3,000,000
LOAN IMPAIRMENT
According to PAS 39, paragraph 58, an entity shall assess at every end of reporting period
whether there is objective evidence that a financial asset or group of financial assets is
impaired. If such evidence exists, then the entity shall determine and recognize the amount
of any impairment loss.
The evidence of impairment which may have resulted to the following loss events occurring
after initial recognition is as follows:
a. Significant financial difficulty of the issuer or obligor.

b. Any breach of contract which may be in the form of default or delinquency in the
interest or principal payments.
c. Debt Restructuring – The lender for economic or legal reasons relating to the
borrower’s financial difficulty, grants to the borrower a concession that the lender
would not otherwise consider.
d. A probability that the borrower will enter bankruptcy or other financial reorganization.
e. The disappearance of an active market for the financial asset due to financial
difficulty.
f. Observable data indicating that there is a measurable decrease in the estimated
future cash flows from a group of financial assets since the initial recognition of those
assets, although the decrease cannot yet be identified with the individual financial
assets in the group.
Measurement of Impairment
If there is an evidence that an impairment loss on loans receivable carried at amortized cost
has been incurred, the amount of loss is measured as the difference between the carrying
amount of the loan and the present value of estimated future cash flows discounted at the
original effective interest rate of the loan as per PAS 39, paragraph 63.
The impairment shall be recorded either by directly reducing the carrying amount of the
loan receivable or through the use of an allowance account. The amount of loss recognized
shall then be recognized in the profit or loss.
ILLUSTRATION: Impairment with accrued interest.
Asian International Bank loaned P 4,000,000 to Bank Arote Company on January 1, 2020. The
terms of the loan require an annual principal payment of P 1,000,000 each year for 4 years
plus interest at 10%. The first principal payment is due on December 31, 2020. The company
made the required payments for year 2020 and 2021.
In 2022, the company began experiencing financial difficulties and was unable to make the
required principal and interest payment on December 31, 2022. On December 31, 2022, the
Bank assessed the collectability of the loan and determined that the remaining principal will
be collected but the collection of interest is doubtful.
The loan receivable has a carrying amount of P 2,200,000 inclusive of accrued interest of P
200,000. The bank has the following projected cash flows from the loan on December 31,
2022 as follows:
Amount
Date of Cash Flow Projected
December 31, 2023 300,000
December 31, 2024 700,000
December 31, 2025 1,000,000
Total Cash Flows 2,000,000
The following are the corresponding present value of 1 using the original effective interest
rate of 10%:
One Period 0.9091
Two Periods 0.8262
Three Periods 0.7513
As a result, the present value of the cash flows is computed as follows:
December 31, 2023 ( 300,000 x 0.9091) 272,730

December 31, 2024 ( 700,000 x 0.8262) 578,340
December 31, 2025 (1,000,000 x 0.7513) 751,300
Total Present Value of Cash Flows 1,602,370
To compute for the impairment loss, get the difference of the carrying amount of the loans
receivable and the present value of cash flows:
Carrying Amount of the Loan P 2,200,000

Total Present Value of Cash Flows 1,602,370
Impairment Loss P 597,630
The entry to recognize the impairment loss on December 31, 2022is:
Loan Impairment Loss 597,630

Allowance for loan impairment 397,630
Any accrued interest must be credited directly since collection of the interest is already
doubtful. On December 31, 2022 the loan receivable is now shown as follows:

Allowance for Impairment (397,630)
Carrying Amount P 1,602,370
The following will now be the entries for the collection and recognition of interest income for
the next three years:
December 31, 2023

To record the cash collection:
Cash 300,000
Loans Receivable 300,000
To record the interest income using effective interest method:
Interest Income (1,602,370 x 10%) 160,237
The interest income is computed by multiplying the carrying amount of the loan by its rate
of 10%. Consider that the recognition of interest income is charged against the allowance
for impairment thus reducing its balance.
December 31, 2024

Cash 700,000
Loans Receivable 700,000

Interest Income(1,462,607 x 10%) 146,261

Allowance for Impairment (397,630-160,237) (237,393)
December 31, 2025

Cash 1,000,000


Interest Income (P 908,868 x 10%) P 90,887
Note: The difference of P245 between P90,887 and P91,132 is due to rounding of present
value factors.
ILLUSTRATION: Impairment without accrued interest.
On January 1, 2020 Legend Bank granted a loan to Furious Inc. in the amount of P 4,500,000.
The terms of the loan were payment in full on December 31, 2025 plus an annual interest of
10% payable every December 31. First interest payment was made on December 31, 2020.
However, on December 31, 2020, due to financial difficulties, Furious Inc. informed the bank
that it would possibly miss the interest payments for the next two years. After that the
borrower expects to resume annual interest payments but the principal is expected to be
settled on December 31, 2026 or one year late with interest paid for the additional year.
Accordingly, the payments are scheduled as follows:
December 31, 2021 No interest payment 0

December 31, 2022 No interest payment 0
December 31, 2023 Interest Payment (4,500,000 X 10%) 450,000
December 31, 2024 Interest Payment 450,000
Principal Payment 4,500,000
Using the original effective interest rate of 10%, the present value of 1 is as follows:
Three periods .7513

Four periods .6830
Five periods .6209
Six periods .5645
Present Value is computed as follows:
December 31, 2023 (450,000 x .7513) 338,085

December 31, 2024 (450,000 x .6830) 307,350
December 31, 2025 (450,000 x .6209) 279,405
December 31, 2026 (4,950,000 x .5645) 2,794,275
Total Present Value of Loan 3,719,115
Carrying amount of loan P 4,500,000

Present Value of Loan 3,719,115
Impairment Loss P 780,885
Unlike the first illustration, there is no accrued interest in this problem. The following are the
entries:
Jan 1, 2020 Loans Receivable 4,500,000

Cash 4,500,000
Dec 31, 2020 Cash 450,000

Loan Impairment Loss 780,885

Dec 31, 2021 Allowance for loan impairment 371,912
Interest Income (10% x 3,719,115) 371,912
Dec 31, 2022 Allowance for loan impairment 408,973


10% of P 4,091,027 equals P 409,103 or a difference of P 130 due to rounding off.
Observe that amortization is done only for the two-year period wherein the company cannot
pay the interest.
Dec 31, 2023 Cash 450,000

Dec 31, 2024 Cash 450,000

Dec 31, 2025 Cash 450,000

Dec 31, 2026 Cash 4,950,000

To succeed, you have to believe in something with such a passion

that it becomes a reality.
Anita Roddick
FORMATIVE ASSESSMENTS
Problem 1
Feasible Company sold to another entity a tract of land costing P5,000,000 for P7,000,000
on January 1, 2020. 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, 2022.
Required: Prepare journal entries for 2020, 2021, and 2022.
Problem 2
Bygone Company manufactures and sells computers. On January 1, 2020, 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.
Required: Prepare journal entries for the current year.
Problem 3
Innovative Company manufactures and sells electrical generators. On January 1, 2020, the
entity sold an electrical generator costing P700,000 for P1,000,000. The buyer paid P100,000
down and signed a P900,000 noninterest-bearing note payable in three equal installments
every December 31. The prevailing interest rate for a note of this type is 12%. The present
value of an ordinary annuity of 1 for three periods is 2.4018.
Required: Prepare journal entries for the current year.
Problem 4
Gullible Company is a dealer in equipment. On December 31, 2020, the entity sold an
equipment in exchange for a noninterest-bearing note requiring five annual payments of
P500,000. The first payment was made on December 31, 2021. The market interest for similar
notes was 8%. The relevant present value factors are:
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
Required:
1. Prepare journal entries for 2020 and 2021.
2. Determine the carrying amount of the note receivable on December 31, 2021.
3. Determine the interest income for 2022.
Problem 5
On January 1, 2020, Enigma Company sold an equipment costing P500,000 which had a
carrying amount of P350,000, receiving a P125,000 down payment and, as additional
consideration, a P400,000 noninterest-bearing note due on January 1, 2023.
There was no established exchange price for the equipment, and the note had no ready
market.
The prevailing rate of interest for a note of this type at January 1, 2020 was 12%. The present
value of 1 at 12% for three periods is 0.7118.
Required: Prepare journal entries for 2020, 2021, 2022 and 2023
Problem 6
On January 1, 2020, Empress Bank granted a loan to a borrower. The interest rate on the
loan is 10% payable annually on December 31, 2020. The loan matures in three years on
December 31, 2022.
Principal amount 5,000,000
Direct origination cost incurred 457,500
Origination fee received from the borrower 200,000
After considering the origination fee charged against the borrower and the direct
origination cost incurred, the effective rate on the loan is 8%.
Required:
1. Compute the carrying amount of the loan receivable on January 1, 2020
2. Prepare a table of amortization of the direct origination cost.
3. Prepare the journal entries for 2020, 2021, and 2022.
Problem 7
Cozy Bank loaned a borrower P7,500,000 on January 1, 2018. The terms of the loan were
payment in full on January 1, 2023, plus annual interest payment at 12%.
The interest payment was made as scheduled on January 1, 2019. However, due to
financial setbacks, the borrower was unable to make the 2020 interest payment.
The bank considered the loan impaired and projected the cash flows from the loan on
December 31, 2020.
The bank accrued the interest on December 31, 2019, but did not continue to accrue
interest for 2020 due to the impairment of the loan.
Projected cash flows
Date of cash flow Amount projected on December 31, 2020
December 31, 2021 500,000

December31, 2022 1,000,000
December 31, 2023 2,000,000
December 31, 2024 4,000,000
Present value of 1 at 12%
For one period 0.89

For two periods 0.80
For three periods 0.71
For four periods 0.64
Required:
1. Compute for the present value of the loan receivable on December 31, 2020
2. Compute the impairment loss on the loan receivable
3. Prepare journal entries for 2020, 2021, and 2022.

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AE 121

COURSE LEARNING OUTCOMES

ILLUSTRATION: Interest Bearing Note – Short term

February 28 Cash 5,083

To illustrate the concept of amortization, the following illustrations may be followed.

ILLUSTRATION: Interest Bearing Note – Long term

On January 1, 2020 Freewill Incorporated sold a machine costing P 400,000 to Grutee

The following are the entries for the said transaction:

Jan 1, 2020 Notes Receivable 500,000

Dec 31, 2020 Accrued Interest Receivable 50,000

Dec 31, 2021 Accrued Interest Receivable 50,000

Dec 31, 2022 Accrued Interest Receivable 50,000

Jan 1, 2023 Cash 650,000

Face Value P 500,000

The following are the entries for 2021 – 2023:

Dec 31, 2022 Accrued Interest Receivable 60,500

Jan 1, 2023 Cash 665,500

Face Value P 500,000

ILLUSTRATION: Non-Interest-Bearing Note – Long Term (Outstanding Method of Amortization)

Face Value P 800,000

Cash Sales Price P 600,000

The following are the entries for 2020:

To record the Sale on January 1, 2020:

Notes Receivable 800,000

Unearned Interest Income 80,000

Year Notes Fraction Interest

The Unearned Interest Income will now have a balance of:

Total unearned Interest Income P 200,000

Face Value P 450,000

Down Payment P 150,000

The following are the entries for 2020:

To record the sale on January 1, 2020:

To record collection of first installment payment on December 31, 2020:

Unearned Interest Income 37,304

Date Annual Interest Principal Present

ILLUSTRATION: Non- Interest-Bearing Note – Long Term (Lump Sum Payment)

On January 1, 2020, DEF Corporation sold an equipment costing P 800,000 with an

Face Value P 300,000

Down Payment P 200,000

To record the sale on January 1, 2020:

Dec 31, 2020 Unearned Interest Income 22,539

Dec 31, 2021 Unearned Interest Income 24,793

Dec 31, 2022 Unearned Interest Income 27,278

To record payment on January 1, 2023:

Date Interest Unearned Interest Present

VALUATION OF LOANS RECEIVABLES

ILLUSTRATION: Origination fees

Principal Amount P 3,000,000

The initial carrying amount of the loan is computed as follows:

Principal Amount P 3,000,000

To record the loan:

Loans Receivable 3,000,000

To record the receipt of origination fees received from the borrower:

Unearned Interest Income 100,000

Present Value of Principal (3,000,000 x 0.693) P 2,079,000

Present Value of Principal (3,000,000 x .675) P 2,025,000

Date Interest Interest Amortization Carrying

The entries on December 31, 2020 are as follows:

Unearned Interest Income 40,529

Loan Receivable P 3,000,000

This presentation is in accordance with the standard requiring loans receivables to be

The entries on December 31, 2021 are as follows:

Unearned Interest Income 46,203

The entries on December 31, 2022 are as follows: