CHAPTER 05: Notes Receivable Se es A aR yc OUTUNE: JP" Ganor ns on om sen when promsry ote wa th conden vce 1. sales revenue in which promisiory note was the considerston ecenee 4 ntat measurement of notes receWabe “4 subsequent meaturement of notes receivable i income ‘5, interes & interest receivable 2 Ccurrent and nencurrent classification of notes recehable Notes Receivable —are claims supported by formal promises to pay usually In the form of notes, Its written contract in which one person promises to pay another persona define sum of money, Notes Receivable versus Loans Receivable versus Bonds Receivable: Taeaof | ote Sree __ Comparison Receivable ____Recetvable Receivable ‘Non-bank \ Holder ofthe | Be al oak os tarcial |< enor orspsey acer | Nontnanaa ; \ \ on nana ination rivera ws) a T areata rien document | rominaryste | Promworyate Bond indenture ieee ae cace. \ | 6 \ Usual reason of | Sale of goods, services, | Lendingofcashto | Lending of cash for issuance | or PPE Vege reets i renner) passive income \ Short Term Notes Receivable: Conceptually, notes receivable shall be measured initially at present value of future ash receipts and subsequently measured at present value of remaining future cash receipts. However, short-term nates + recelvable is practically measured at face value since the effect of discounting s usually not material coe ‘of business ‘Accounting for Notes Receivable: © Initially, notes receivable are meaéured at fair value since no transaction cost are being, paid when notes are being issued. Fair value ofthe note is equal to the present value of future cash receipts, Subsequently, notes are measured at amortized cost using the effective interest method. The. ‘amortized costs also equal to the present value of remaining future cash receipts at year-end. * _Interestincome is equal to the effective interest which is computed by multiplying the effective interest rate to the carrying amount of the notes at the beginning of the period.forthe UnPaId Portion op aver a sce ma eesae some = = rest cot me eS yor, Tas comes vette present oe oF Pil ers in ed eault te r ¢ rege ve of pineal and He ge a peste Para a Note + Current portion of he eae rier Interest payment within Forbin a ee saved tom he va of cones eo eal raak pa vate of re invert. creee Ta Down payment Ly Far vale of Note ecetab b._ Present yale offre cash e8 pm , Pv of pencil PV of nominal interest ff 207) ae Fair value of Note recefabie a ‘GAIN OR LOSS ON SALE oo alan aed tine of PE, vrai CASTES NE a received jn tools from sale maybe asked ‘exchange for PFE that mo 0 Fair value of - mx Down payment x Total Vof consideration received PX Camying amount of PPE sold 10 E Gain oes from sale pM [SALES REVENUE If what was sold ae invent eee try or service, the sales or revenue is measured at total fair value ofof Notes: pie the Notes ciate es clvable wil depend on the typeof notes received. The following te The eeren pes oF MAS: Tora iterest fective interes (C) Eee eae ac Since Seon wh Unreltc Nombal eres | MW ER cal} rectve Interest Rate: erect le the nominal interests enualtotheeffecenteret. Exception the ie Te nate is noninterest-bearing Bie Velue of consideration given ups not equal tothe face amount ofthe note nthe above exception the effective interest rate shoul be computed not given nthe problem ws in and error and interpolation if necessary aa = 4. INTEREST BEARING NOTE (eee pearance ir Meee [o_iniiatmeasurement Te Subsequent measurement [Remaining faceamount_——__\ fecinterestincome ‘ace amount x Noninainirestrate | Face amount payable beyond one year portio Face amount payable within one year ‘ince the nominal interest and effective interest are equal there is n@ premium nor discount and the present value ofthe note is equal tothe Face amount. 2. NONANTEREST-BEARING NOTE. ‘2. Initial measurement (Fair value)~ Financial asetis initially measured atfair val Of a Note receivable is equal to the present value of future cash receipts. f the note is non ‘terest bearing, the only future cash receipts the principal (no nominal interest. Principal amount we Times: PVF of 1 x | Times: PVF of annuity value of NR B___XX | Faievalue of NRsubsequent measurement of teed ations the initial measure tery ee erase sat Sy deened ty thee eee amanda, esa ‘a, Sabsequertlyneeas by thee i" fae eae a Xx ines: 1+Eective int. rate 2 a2nglt fecive inerest the Crr¥ing amo eee) Te bass ofthe 3 im © ee Oe ean Ye re the Note rece Stearn aman athe bape a Carrying amount, beg Pia Times: Effective intrest rate Interest income 2 4. Interest receivable - zero © Non-current portion of Note receivable - Ifthe rote & Term note, it will be classified as ether fal curent asset o: faly norurent asset dependig on the maturty date. However, ifthe | recent Tel note it has both curent and nancurent portion and separation of which fy necessary, a Frat onan radon atu oye. Ths th poten of | ! the note thats not collectibe after a year, ae a ‘Carrying amount, end FaexN a Times: 1+ Effective interest rate ah _ to ‘ess: Principal payment Po a Noncurrent portion of Na > Pe £ Curent portion : Nee eh Ligne = 10 te resicusl ofthe, carrying amount of . of the Note after one period, di *13%0 the decreased in crying amour Carrying amount, end Pox 4 tess: Noncurrentporton i 5 Current portion esidva) ei a orate ery qusrnanion't Montene Bearing rent Oy 0 Tone ft!eaomert wit a carne gman of PBIODOD A ex enge price forthe C@UPTENE. The prevalingimeren January 1 2028, There was ne etlshed cnn toptor te pods 05, note was 0h The prevent valve J hats the cacyng amount ofthe noe recehae on at Nn 4,950,000 © 6,000,009 Caer @ 4300,000 D. 4,800,000 isco sould be evtred ei gt bloc ae eae ‘A, 1,200,000 gain bs00 000 guns Han 3 2,700,000 gain ©, 300,00 ess Whats the carrying amount of the note on December 33, 20772 ‘A. 4,950,000 ©. 5,000,000 8. 4500000 ©. 4,800,000, a4; What amount should be reported as interest income for 2022? * ‘A, 600,000 © 523,000 500,000 ©. 850,000 ‘What amount should be reported as interest income for 20237 ‘A, 480,000. ¢. 528,000 B. 495,000 1. 500,000 - Answer: B Note receivable are Initially measured at fairvalue, We cannot refer the fair value of the Note receivable. tothe consideration giuen-up since the fair value of the equipment is not available. AS an alternative, the fair value of Non-interest-bearing note can be computed by getting the present value of the pine Principal amount ® 6,000,000 Present value of 1 075 Fair value of the Note 14,500,000 ‘Answer 2: D ‘The gain or loss from disposal is the difference between the fair value of total consideration received and the carrying amount of the asset elven-up. Fair value of the Note received P 4,500,000. Down payment beside Total consideration received 4,500,000 Carrying amount of asset sold 4,800,000) Loss on sale {p___300,000)o cae i oe ne anottd cere 8 incre ray Anewer 3: * re enh eta gd Pe nee ith. Unger cay ee iS 4 the effective rate every period my oie that Non intrest bearing note doer Pe Fair-value of the Note (nial meas ae Times 1 efeche terest a marized cot, Docerbe 31-2022 on the crying amo, jg based ant ay Arsen 42D, nec te pero because. of nor ee xe ee «har he begining of the pei. se amortization, the interest! “ineome also chang Carrying aur, sunt 2022 (eg Sas Tires: effective interes 2 008 Interest income, 2022 neon far 2 2023, WE have to mn the carying 204 Answer 5: 0 mn such d3te Since thé interest income of 20 amortize first the Note to dete 523 is based ine the earyng amour 2 p 4,500,000 Carrying amount, Jangaty 3; 2022 fess ousis0 Times: 1+ Effective interest rate 75,950,000 Carrying amount, January 1, 2023 Pons 108 Times: effective interest rate 5.000 Interest income, 2023 000 is classified as Non-current asset. unt of P8,95 ‘ the ull carving 370 receivable is a term-note ang Note: On Deceit 3, 2022 f , ss current asset since the ‘and no portion ofthe note is classifieds ‘payable in two years. ausramoni2 ieciwc obo sraice) cies ‘Ga Januny 4, 2022 Nonstop Company soda buena fr F,0,000 6 Ieee ‘Company. Icecream Company td #50000 down adslgedaroninteret bearingnote or the balance which is payable in three equal annual installments every December 31 of each Year. The carrying amount of the bling 4 20,00, Assume prealing interest rate fora note of this typeis 12%. ‘ Present value of Jat 12% for 3 periods 07118 Present value of ordinary annuity at 12%for 3 periods 2.4018 Qi: How:muchis the gan o oss onsale of building? A, 597,300 . 800,000 . 8 97,300 ‘0, 300,000 as a Gme corying aunt of notes on Dec TK 3900000 2syzgpq Nh 20218 300700 © aashena How much isthe interest income or ess o since tor the year 30231 8 492,328 ©, 40,000 si Thenor-cutent portion of ates on December, 2022 8 he 4500000 1,195,797 6. 1967676 0. 4.339277 fas; The current portion of notes en December 31, 202215 ® 1500000 1,195,797 e 1087676 ©. 130,207 Pare: loss from sale isthe die aay lass from sale is rence of the fair value reexved (Note and down payment) an earring amount of 2s5ct ven. {Nonconc Gowns payivers end se selling price Boum paren Baas Principal amount of Note eon ‘Term of the note ae Principal per installment Sema cone Present value factory of annuity Pac Fair value of the note (Initial measurement) = 3502,700 eat Fair value of the Note 36027700 ‘ Down payment 00,000 a ‘Total fair value of consideration received P 402,700 Carrying amount of asset alver-up 4,209,000) Loss on sale es, ‘Answer 2: C a f Carrying amount, January 1, 2022 p -3;602,700 Times: 1+ Effective interestrate 4az ‘able Less: Principal payment for 2022 {___1500,000) Carrying amount, December 31, 2022 B__2,525,028 iis ee ‘Carrying amount, January 4, 2022 , p 3,502,700 Times: Effective interest rate SS pe Interest income, 2022 : Bp _a32,324 81cetera eecyrester ening Peete nent esr ca aay Sra . Caring amount Decne 3.2022 Toran Elecve mers oe amt ral pape or 22 on Nos cpa ohm ert Oem? Answer sf cedure tocar ee acento eer ean rerio seal eae ih a ern Te elt plore Ribera bac Cotected portion wth oe YO 2m Caryn mene, december 3 Noweurrent prion of NR(CATVEE Charen part fa (DEH neann wr nnensicHOMINALTATE aes ee ee a : Sra} Tet vaio HS tPEC : 1 Infalmensarerene (Fao: The ofthe Pci on Nonna ee Present valu ofthe princi ‘Add: Present value of nominal interest ‘he starting point of amortization isthe ini Fairvale Subsequent measurement (Amortized co3t: measurement and subsequently increas b eae by the Nominal interes (paid or unpai) and collection. Prarie inerest eared and willbe decreased te principal (for serial notes). By Less: Principal payment Amortized cost Interest income (Eectv interes} ~The basis of the elective Interest isthe carrying amount of the Note receivable atthe beginning ofthe period. You can amortize the Note to, for the carrying amount atthe beginning. eed_Intoret receivable ~The interest rece ier habe fs eaual tothe nominal terest forthe poston Principal amount “Times: Nominal meres ate Times: Months unpaid ver 12 mos, Interest eshte jonths unpaid is from the ast Interest pay me Tnceres payment ate upto December 33 Nom-current portion of Note receivable Th 12 Nan-curent portion she amortized cast of the Note after one year. This the portion ofthe Note that sot collectible after a year. Carrying amount, end Pom ‘Times: 14 Effectwe interes ate ™ Lew Principal payment ey ese Nominal interest a ‘Noncurrent portion of NR « ‘current portion ofthe Note recelvable~ Tiss equal thersiual ofthe carrying amount of the Note after deducting ts nor-current parton, This sls the decreased incarnng amount of the Note after one period. ae: Carrying amount, end. PK Less: Noncurrent portion (ey Current portion (residual) Ea One IMUSTRATION 3 [Interest Bearing with Unrealistic Nominal Rate— Term Note) F ps eased ‘On January 1, 2022, Rzal Company finished consultation services and accepted in exchange a promissory rote with a face value of P200,000, due date of December 31,2024, and astated rate of5%, with interest receivable atthe end of each year. ‘The fairvalue of the services isnot readily determinable and the note isnot readily marketable. Under Py the creumstances, the note ls considered to have an appropriate imputed rate of interest of 10%. The 1% following interest factors are provided: x) re. Table factors forthree periods 10% iy Present value of 075132 Present value of ordinary annuity 2.88585 tount Qt: What is the amount of consultation service revenue to be present in the company’s income: ipute statement? A. 175,133, Cc 150,264 B. 24,869 D. 200,000 83uusTRATION (interest Bearing with Urvecicte Nominal Rete Sel Note) - 4, 2022, Stain Company sold 3 ge si anor very equipment costing P2,000,000 with accumula deprecation of 150,000 n exchange of» thre year, 10, P1800 000 terest bearing nate The note dep ectble in esl anual amount staring December ai, aoas rehoding maar ‘The prevailing rate of Interest of similar note on this date was at 12%. The following interest factors are vided p00 Present value of 1 at 1236 PVof annuity of at 12% ‘893 0.893 0.797 1.690 0712 2.802 How much Ie the loss on sale of equipment? ‘A. 259,500 C. 131,150. 8 109,700 . 200,000. (a2: How much is the carrying amount of the note on December 31, 20222? A 139936 1,200,000 B 1,769,136 D. 1,165,136 How much is the interest income in 20227 A. 198194 208,836 8, 174,030 D. 180,000 How much isthe current portion of the note an December 31, 20227 A. 639,704 c. $89,432, B. 579,708 . 600,000 How much is the noncurrent portion of the note on December 31, 20222 A. 529244 59,248 B, 579,704 D. 20,287 Answer 4: 8 Since the Note receivable Is a serial note, to compute the present value of principal, present value of annuity should b¢ used. However, because the principal is not constant (decreasing every period). The basis for the nominal interest is also not constant, in effect the nominal interest is not uniform and present value of annulty should not be used. To compute for the present value of the nominal interest, each nominal interest will be multilied by the present value of 1. Present value of Principal (1,800,000 / 3) x 2.402 P —1/4a1,200 Present value of Nominal interest in Year 1 (1,800,000 x 10% x.893) 160,740 Present value of Nominal interest in Year 2 (1,200,000 x 10% x.797) 95,640 Present vajue of Nominal interest in Year 3 (600,000 x 10% x 712) Fair value of the Note receivable 42,720 B71,740,300 85