Notes Receivable

Definition of terms:

Note Receivable – A claim supported by a formal promise to pay a certain sum of money at a specific
future date usually in the form of a promissory note. It may be legally sell or transfer the note to others.

· Interest bearing – have a stated interest

· Noninterest-bearing- No stated interest rate, They include the interest element as part of
the face amount.
· Notes obtained from the sale of goods or services are classified as trade notes receivable

Significant Financing component – It is the benefit of financing the transfer of goods or services to
the customer (Mga discounts to and stuff)

Face amount – It is the original amount being borrowed and what is stated in the notes receivable.
Ex: kung meron hihiram saakin ng 10 000 na due in 3 yrs tapos ung PV niya ay 7 118, 10 000 ung Face value.

Present Value- current value of a future sum of money or stream of cash flows given a specified rate
of return.

Imputed interest rate- Parang effective interest rate, market rate and yield rate lng to siya

Cash price equivalent-The amount that would have been paid if the transaction was settled outright
on cash basis, as opposed to the installments basis or other deferred settlements.

Measurement:

Short-term receivable – may be equal to its face amount. If it has a significant financing component,
The fair value is equal to its present value.

Long-term receivables:

· Long-term receivables that bears a reasonable interest rate – is equal to the face amount.
Interest rate is reasonable if it approximates the market rate at transaction date.
· Long-term receivables that bears no interest- is equal to the present value of future cash
flows from receivables discounted using an imputed interest rate
· Long-term receivables that bears an unreasonable interest rate- is equal to the present value
of future cash flows from receivables discounted using an imputed interest rate

Time Value of money:

1 and 2 are lump sum basis

Downloaded by Joneth Dueñas (joneth.duenas@dmc.edu.ph)

1. Future value of an Amount:

P(1+i)n
1. Present Value of a future amount:
P(1+i)-n
Present Value is segregated with two elements:
Principal element- Represents the measurement of the note
Interest element- Initially recognized as unearned interest and amortized over the life of the
note as interest income

It is recorded as follows:

Date Note Receivable XX

Revenue XX
Unearned interest income XX
Unearned interest income is a deduction to the note receivable when computing for the note’s carrying
amount. Carrying amount of a note is equal to the present value.

A receivable that bears a reasonable interest rate does not need to be discounted to present
value because its face amount is its principal amount. No segregation is needed because the
principal is specified; The interest element is recognized separately in profit or loss.

2. Future value of an annuity:

Ordinary annuity
(1+i)n−1
i P¿
Annuity due )

P ( (1+i) −1
i
n
)x (1+i )
3. Present value of an annuity
Ordinary annuity
1−(1+i) −n

i P¿
Annuity due
)
P( 1−(1+i )−n
i )x (1+i )

Downloaded by Joneth Dueñas (joneth.duenas@dmc.edu.ph)