Notes Receivable - Part2

Chapter 6
NOTES RECEIVABLE
Mrs. Lucia A. Suello, CPA, MBA

CHAPTER 6
NOTES RECEIVABLE
LEARNING OBJECTIVES:
1. Discuss the concept of note
receivable.
2. Know the initial and subsequent
measurement of notes receivable.
3. Know the accounting for interest-
bearing note receivable.
4. Know the accounting for noninterest-
bearing note receivable.
4.
INITIAL MEASUREMENT
 LONG TERM NOTES RECEIVABLE
Noninterest bearing
Measured at present value
which is the discounted value
of the future cash flows using
the effective interest rate.
SUBSEQUENT
MEASUREMENT
 LONG TERM NONINTEREST
BEARING NOTES RECEIVABLE
 Amortized cost is the present value
minus principal repayment, plus
amortization of discount or the face
value minus the unamortized
unearned interest income.
SALE ON INSTALLMENT BASIS
(NONINTEREST BEARING NOTE)
A. Cash Price is Available
•Amount of sales to be recorded
is the cash equivalent price at the
recognition date.
•The difference between the cash
price equivalent and the total
payment (downpayment plus face
value of the note) is recognized as
interest over the period of credit.
COMPUTATION OF INTEREST
WITH CASH PRICE:

Installment Price Pxxx
Cash Price (xxx)
Interest Income Pxxx
Unearned Interest Income

SALE ON INSTALLMENT BASIS
(NONINTEREST BEARING NOTE)
B. No Cash Price is Available
• Selling price is recorded equal to the
present value of all payments
(downpayment plus present value of
note receivable) using an implied
interest rate.
• The difference between the face value
of the note and the present value of
notes receivable is treated as an
interest to be amortized over the
credit period.
(INSTALLMENT PAYMENT)
*PV = Installment Payment x PVF
WITHOUT CASH PRICE:
FV of Notes Receivable Pxxx
PV of Notes Receivable (xxx)*
Implied Interest Pxxx

(LUMP SUM PAYMENT)
*PV = FV of note x PVF of 1
WITHOUT CASH PRICE:

ILLUSTRATION
 NONINTEREST BEARING NOTE (with cash sales price,
installment payment)
An entity manufactures and sells machinery. On

January 1, 2019, the entity sold machinery costing
P280,000 for P400,000.
The buyer signed a noninterest bearing note for

P400,000 payable in four equal installments every
December 31. The cash sales price of the machinery
is P350,000.
WITH CASH PRICE:

Installment Price Pxxx
Cash Price (xxx)
Interest Income Pxxx

WITHOUT CASH PRICE:

FV of Notes Receivable P400,000
PV of Notes Receivable (350,000)
Implied Interest P50,000

JOURNAL ENTRIES
FIRST YEAR:
2019:
1/1 Notes receivable 400,000
Sales 350,000
Unearned interest income 50,000
12/31 Cash 100,000

Notes receivable (P400,000 ÷ 4) 100,000
- Unearned interest income 20,000

Interest income 20,000
AMORTIZATION TABLE
Interest Income
2019 400,000 4/10 x P50,000 = 20,000
2020 300,000 3/10 x P50,000 = 15,000
2021 200,000 2/10 x P50,000 = 10,000
2022 100,000 1/10 x P50,000 = 5,000
Total 1,000,000 50,000
FS PRESENTATION
12/31/2019:
BALANCE SHEET:
Current Asset:
Notes receivable (current portion) P100,000
Unearned interest income (15,000)
Carrying amount or amortized costP85,000
NonCurrent Asset:
Notes receivable (noncurrent portion) P200,000
INCOME STATEMENT:
Interest Income P20,000
JOURNAL ENTRIES
SECOND YEAR:
2020:
12/31 Cash 100,000


FS PRESENTATION
12/31/2020:
BALANCE SHEET:
Current Asset:
NonCurrent Asset:
INCOME STATEMENT:
ILLUSTRATION
 NONINTEREST BEARING NOTE (without cash sales price,
installment payment)
An entity sold an equipment with a cost of P250,000

for P400,000. The buyer paid a downpayment of
P100,000 and signed a noninterest bearing note for
P300,000 payable in equal annual installment of
P100,000 every December 31.
The prevailing interest rate for a note of this type is

10%. The PVF of an OA of 1 for three periods is 2.4869.
*PV = Installment Payment x PVF
WITHOUT CASH PRICE:

*PV = 100,000 x 2.4869
WITHOUT CASH PRICE:
PV of Notes Receivable (248,690)*

NONINTEREST BEARING NOTE (without cash sales price,
instalment payment)
Downpayment P100,000
PV of note receivable 248,690
Total consideration received P348,690 selling price
Cost/book value of equipment (250,000) only cost is given
Gain on sale P98,690
JOURNAL ENTRIES
FIRST YEAR:
2019:
1/1 Cash 100,000
Notes receivable 300,000
Equipment 250,000
Gain on sale of equipment 98,690
12/31 Cash 100,000


AMORTIZATION TABLE
Annual Interest Principal Present
Collection Income Value
1/1/19 248,690
12/31/19 100,000 24,869 75,131 173,559
12/31/20 100,000 17,356 82,644 90,915
12/31/21 100,000 9,085 90,915 -0-
Total P51,310
FS PRESENTATION
12/31/2019:
BALANCE SHEET:
Current Asset:
NonCurrent Asset:
INCOME STATEMENT:
Book Value of Notes Receivable (Total)
12/31/19
Notes Receivable 200,000
Book Value P173,559
JOURNAL ENTRIES
SECOND YEAR:
2020:
12/31 Cash 100,000

FS PRESENTATION
12/31/2020:
BALANCE SHEET:
Current Asset:
Carrying amount or amortized cost P90,915
INCOME STATEMENT:
ILLUSTRATION
 NONINTEREST BEARING NOTE (without cash sales
price, lump sum payment)
On January 1, 2019, n entity sold an equipment with

a cost of P600,000 with accumulated depreciation of
P250,000. The entity received as consideration
P100,000 cash and a P400,000 noninterest bearing
note due on January 1, 2022.
The prevailing interest rate for a note of this type is

10%. The PVF of 1 for three periods is 0.7513.
(LUMP SUM PAYMENT)
*PV = FV of note x PVF of 1
WITHOUT CASH PRICE:

(LUMP SUM PAYMENT)
*PV = 400,000 x 0.7513
WITHOUT CASH PRICE:
PV of Notes Receivable (300,520)*

NONINTEREST BEARING NOTE (without cash sales price,
lump sum payment)
Downpayment P100,000
PV of note receivable 300,520
Total consideration received P400,520 selling price
Book value of equipment (350,000) 600,000 – 250,000
Gain on sale of equipment P50,520
JOURNAL ENTRIES
FIRST YEAR:
2019:
1/1 Cash 100,000
Accu. Depreciation 250,000
Equipment 600,000
Gain on sale of equipment 50,520
12/31 Unearned interest income 30,052

AMORTIZATION TABLE
Interest Unearned Present
Income Interest Value
1/1/19 99,480 300,520
12/31/19 30,052 69,428 330,572
12/31/20 33,057 36,371 363,629
12/31/21 36,371 -0- 400,000
Total 99,480
FS PRESENTATION
12/31/2019:
BALANCE SHEET:
NonCurrent Asset:
INCOME STATEMENT:
JOURNAL ENTRIES
SECOND YEAR:
2020:
12/31 Unearned interest income 33,057
FS PRESENTATION
12/31/2020:
BALANCE SHEET:
Non Current Asset:
Notes receivable P400,000
INCOME STATEMENT:
JOURNAL ENTRIES
THIRD YEAR:
2021:
12/31/21 Unearned interest income 33,057
---------------------------------------------------------------------
2022: (COLLECTION)
1/1/22 Cash 400,000
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 40

Notes Receivable - Part2

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Chapter 6

Mrs. Lucia A. Suello, CPA, MBA

WITH CASH PRICE:

Unearned Interest Income

Unearned Interest Income

Unearned Interest Income

An entity manufactures and sells machinery. On

The buyer signed a noninterest bearing note for

WITH CASH PRICE:

Unearned Interest Income

WITHOUT CASH PRICE:

Unearned Interest Income

12/31 Cash 100,000

- Unearned interest income 20,000

12/31 Cash 100,000

- Unearned interest income 15,000

An entity sold an equipment with a cost of P250,000

The prevailing interest rate for a note of this type is

Unearned Interest Income

Unearned Interest Income

12/31 Cash 100,000

- Unearned interest income 24,869

- Unearned interest income 17,356

On January 1, 2019, n entity sold an equipment with

The prevailing interest rate for a note of this type is

Unearned Interest Income

Unearned Interest Income

12/31 Unearned interest income 30,052

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 40

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