Notes receivable

Outline
• Definition
• Measurement
• Initial and Subsequent
• Interest bearing
• Noninterest bearing note
• Accounting for dishonored notes
 Definition
• Notes receivables are claims supported by formal promises to pay usually
in the form of notes.
• Parties involved:
• Maker (the person who promises to pay)
• Payee (the person to whom the promise is made)
 Definition
• Standing alone, represents only claims arising from sale of merchandise or
service in the ordinary course of business. (i.e. trade)
• Non-trade notes receivables shall be designated separately.
 Measurement
• Initial measurement
 At present value (the sum of all future cash flows discounted using the prevailing
market rate of interest fro similar notes)

• Subsequent measurement
 At amortized cost using the effective interest method
 Interest bearing note
• Initial measurement
• Measured at face value which is actually the present value upon issuance

• Subsequent measurement
• Measured at face value
• Amortized cost is not applicable
 Interest bearing note
1.) Interest is payable annually
2.) Interest is payable at maturity date
 Interest bearing note

Feasible Company sold to another entity a tract of land costing P5milion

for P7million on January 1, 2015. The buyer paid P1million down and
signed a two-year promissory note for the remainder of the purchase price
plus 12% interest compounded annually. The note matures on Jan. 1,
2017.
Required:
Prepare journal entries for 2015, 2016, 2017
2015
Jan. 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
To record sale of land.

2015
Dec. 31 Accrued interest receivable / Interest receivable 720,000
Interest Income 720,000
To record accrual of annual interest

2016
Dec. 31 Accrued interest receivable / Interest receivable 806,400
Interest Income 806,400
To record accrual of annual interest
2017
Jan. 1 Cash 7,526,400
Notes receivable 6,000,000
Accrued interest receivable / Interest receivable 1,526,400
To record collection of notes
 Interest bearing note
(CASE 1)
Feasible Company sold to another entity a tract of land costing P5milion for
P7million on January 1, 2015. The buyer paid P1million down and signed a
two-year promissory note for the remainder of the purchase price plus 12%
interest compounded annually. The note matures on December 31, 2016.
Required:
Prepare journal entries for 2015, 2016
2015
Jan. 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
To record sale of land.

2015
Dec. 31 Accrued interest receivable / Interest receivable 720,000
Interest Income 720,000
To record accrual of annual interest

2016
Dec. 31 Cash 7,526,400
Notes receivable 6,000,000
Accrued interest receivable / Interest receivable 720,000
Interest Income 806,400
To record collection of notes
 Interest bearing note
(CASE 2)
Feasible Company sold to another entity a tract of land costing P5milion for
P7million on January 1, 2015. The buyer paid P1million down and signed a
two-year promissory note for the remainder of the purchase price plus 12%
interest . Interest is payable annually every December 31 and the note
matures on January 1, 2017.
Required:
Prepare journal entries for 2015, 2016, 2017
2015
Jan. 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
To record sale of land.

2015
Dec. 31 Cash 720,000
Interest Income 720,000
To record collection of annual interest

2016
Dec. 31 Cash 720,000
Interest Income 720,000
To record collection of annual interest

2017
Jan. 1 Cash 6,000,000
Notes receivable 6,000,000
To record collection of notes
 Interest bearing note
(CASE 3)
Feasible Company sold to another entity a tract of land costing P5milion for
P7million on January 1, 2015. The buyer paid P1million down and signed a
two-year promissory note for the remainder of the purchase price plus 12%
interest . Interest is payable annually every December 31 and the note
matures on December 31, 2016
Required:
Prepare journal entries for 2015, 2016
2015
Jan. 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
To record sale of land.

2015
Dec. 31 Cash 720,000
Interest Income 720,000
To record collection of annual interest

2016
Dec. 31 Cash 6,720,000
Notes receivable 6,000,000
Interest Income 720,000
To record collection of note & annual interest
 Interest bearing note
(CASE 4)
Feasible Company sold to another entity a tract of land costing P5milion for
P7million on January 1, 2015. The buyer paid P1million down and signed a two-
year promissory note for the remainder of the purchase price plus 12% interest .
Interest is payable annually every December 31. The note is payable in two
equal installment every Dec. 31 will mature on December 31, 2016
Required:
Prepare journal entries for 2015, 2016
2015
Jan. 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
To record sale of land.

2015
Dec. 31 Cash 3,720,000
Interest Income 720,000
Notes receivable 3,000,000
To record collection of note & annual interest

2016
Dec. 31 Cash 3,360,000
Notes receivable 3,000,000
Interest Income 360,000
To record collection of note & annual interest
 Non-interest bearing note
• Initial measurement
• At present value

• Subsequent measurement
• At amortized cost
 Formula for present value

PV factor of ordinary annuity of 1 PV factor of 1 (1+i)-n

1- (1+i)-n
i
 Non-interest bearing note – ex. 1
• Bygone Company manufactures and sells computers. On Jan. 1, 2015, 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 instalments
every December 31. the cash selling price of the computer is P540,000.

• Prepare the entries for the current year.

 Non-interest bearing note

• Non-interest bearing
• Cash selling price is given
• Note is payable in 3 equal installments every Dec. 31.
• Sale of inventory
 Non-interest bearing note – ex. 2
• Innovative Company manufactures and sells electrical generators. On Jan.
1, 2015, the entity sold an electrical generator costing P700,000 for
P1,000,000. the buyer paid P100,000 down and signed a noninterest
bearing note payable in three equal instalments every Dec. 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.
• Prepare the journal entries for the current year.
 Non-interest bearing note

• Non-interest bearing note

• The cash selling price not given
• Payable in 3 annual installments
• Prevailing interest rate is given
• Sale of inventory
 Non-interest bearing note – ex. 3
• Gullible Company is a dealer in equipment. On Dec. 31, 2015, the entity sold an
equipment in exchange for a non-interest bearing note requiring five annual
payments of P500,000. the first payment was made on Dec. 31, 2016. the market
interest for similar notes was 8%. The relevant PV 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
1. Prepare the entries for 2015 , 2016
2. Determine the carrying amount of the note on Dec. 31, 2016
3. Determine the interest income for 2017
• On Jan. 1, 2015, Enigma co. sold an equipment costing P500,000 which had
the carrying amount of P350,000 receiving P125,000 down and additional
consideration of P400,000 noninterest bearing note due on Jan.1 2018.
• There was no established exchange price for the equipment, and the note had
no ready market.
• The prevailing interest rate was 12%. The PV of 1 at 12% for three periods is
0.7118.
• Prepare the entries
 Non-interest bearing note

• Non-interest bearing note

• The cash selling price not given
• Lump-sum payment at maturity date
• Prevailing interest rate is given
• Sale of an item of PPE
 Long-term NR (Stated interest rate is lower
than the Market rate of interest) see page 116
• Please answer exercise 3-7
Received
 Long-term NR (Stated interest rate is higher
than the Market rate of interest) see page 118
• Please answer exercise 3-8
Received
 Accounting for dishonored note
• Matured notes not paid
• Shall be removed from the notes receivable account and transferred to
accounts receivable at an amount to include interest and other charges.
• Proforma
AR xxx
NR xxx
Interest income xxx