(Intermediate Accounting 1A)

LECTURE AID

2020

ZEUS VERNON B. MILLAN

Chapter 5 NOTES RECEIVABLE

Learning Objectives

• State the initial and subsequent

measurements of notes receivable.
• Compute for present value factors and
apply them properly.
• Prepare amortization tables.
• Compute for the effective interest rate.

INTERMEDIATE ACCTG 1A (by: MILL

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Note receivables
• Notes receivable is 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.

INTERMEDIATE ACCTG 1A (by: MILL

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Initial measurement

• Receivables are initially recognized at fair value plus

transaction costs.

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Summary of Measurements
Type of receivable Initial measurement Subsequent
measurement
1. Short-term Face amount/ Present Recoverable historical
value/ Transaction price cost/Amortized
(for trade receivables) cost/PFRS 15

2. Long-term Face amount Recoverable historical

cost
3. Long-term w/ zero Present value Amortized cost
interest
4. Long-term w/ Present value Amortized cost
unreasonable interest

The fair value of the receivable at initial recognition may be measured in

relation to the cash price equivalent of the noncash asset given up in
exchange for the receivable. In such case, the subsequent measurement of the
receivable is at amortized cost.
INTERMEDIATE ACCTG 1A (by: MILL
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Time Value of Money
• FV of ₱1 vs. PV of ₱1
- The FV of ₱1 and PV of ₱1 are opposites.
- The FV of ₱1 answers the question “If I invest ₱100,000 today at
10% interest, how much money do I have in three-years’ time?”
- FV of ₱1 = (1 + i)n = (1 + 10%)3 = 1.331
- Answer: (₱100,000 x 1.331 ) = ₱133,100
or (₱100,000 x 110% x 110% x 110%) = ₱133,100
- The PV of ₱1 answers the question “If I want to have ₱133,100 in
three-years’ time, how much money do I have to invest today (at
10% interest)?
- PV of ₱1 = (1 + i)-n = (1 + 10%)-3 = 0.751315
- Answer: (₱133,100 x 0.751315 ) = ₱100,000
PV of ₱1
• In the second example, the ₱133,100 to be received in 3-years’ time
includes an unspecified principal and unspecified interest.
These elements are separated through present value computations.

₱100,000
principal
PV
1₱133,100
computation ₱33,100
unearned interest

Therefore, assuming the ₱133,100 is a receivable, it should be

recorded today only at ₱100,000 (the present value) because the
₱33,100 is unearned interest. The interest will be recorded only when
it is earned, i.e., through passage of time.

INTERMEDIATE ACCTG 1A (by: MILL

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Time value of money (continuation)
• PV of ₱1 is used when the cash flow is lump sum or when cash flows
are non-uniform. PV of ₱1 = (1 + i)-n

• PV of ordinary annuity ₱1 is used when the cash flows are in

installments and the first installment does not begin immediately.

• PV of an annuity due of ₱1 is used when the cash flows are in

installments and the first installment begins immediately.

INTERMEDIATE ACCTG 1A (by: MILL

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Effective Interest Method

• PV of ₱1 amortization table

Date Interest income Unearned interest Present value

(a) = (c) x EIR (b) = previous bal. - (a) (c) = previous balance + (a)
1/1/x1
12/31/x1

INTERMEDIATE ACCTG 1A (by: MILL

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Effective Interest Method

• PV of annuity amortization table

Interest Present
Date Collections income Amortization value
(d) = prev. bal.
(a) (b) = (d) x EIR (c) = (a) - (b) - (c)
1/1/x1

INTERMEDIATE ACCTG 1A (by: MILL

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 APPLICATION OF CONCEPTS

PROBLEM 6: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1A (by: MILLAN)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 1A (by: MILLAN)

 END
INTERMEDIATE ACCTG 1A (by: MILLAN)