Dominican College of Tarlac

College of Business and Accountancy

Junior Philippine Institute of Accountants

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NOTES
RECEIVABLE
Reference: Intermediate Accounting
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NOTES
RECEIVABLE
Notes Receivable
• claims supported by formal promises to pay usually in the form of notes:

 The note may be payable on demand or at a definite future date.

 Standing alone, the term notes receivable represents only claims arising
from sale of merchandise or service in the ordinary course of business
 Thus, notes received from officers, employees, shareholders and affiliates
shall be designated separately.

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Negotiable promissory note
• claims supported by formal promises to pay usually in the form of notes:

 The note may be payable on demand or at a definite future date.

 Standing alone, the term notes receivable represents only claims arising
from sale of merchandise or service in the ordinary course of business
 Thus, notes received from officers, employees, shareholders and affiliates
shall be designated separately.

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Negotiable promissory note
• an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand or at a fixed determinable future
time a sum certain in money to order or to bearer. A written contract in
which one person, known as the maker, promises to pay another person,
known as the payee, a definite sum of money.

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 Dishonored Notes
• When a promissory note matures and is not paid, it is said to be
dishonored.
• Theoretically, dishonored notes receivable should be removed from the
notes
receivable account and transferred to accounts receivable.
• The amount debited to accounts receivable should include the face amount,
interest and other charges.
• Such approach is defended on the ground that the overdue note has lost
part
of its status as a negotiable instrument and really represents only an ordinary
claim against the maker.
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Initial Measurement of Notes Receivable

• Conceptually, notes receivable shall be measured initially at present value.

• The present value is the sum of all future cash flow discounted using the
prevailing market rate of interest for similar notes
• The prevailing market rate of interest is actually the effective interest rate.
• However, short-term notes receivable shall be measured at face value.
• Cash flows relating to short-term notes receivable are not discounted
because the effect of discounting is usually not material

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Interest-Bearing Notes Receivable

• The initial measurement of long-term notes will depend on whether the

notes
are interest-bearing or noninterest bearing.

• Interest-bearing long- term notes are measured at face value which is

actually the present value upon issuance.

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Noninterest-Bearing Notes Receivable
• Noninterest-bearing long-term notes are measured at present value which
is
the discounted value of the future cash flows using the effective interest rate.

• Actually, the term "noninterest-bearing" is a misnomer because all notes

implicitly contain interest

• It is simply a case of the "interest being included in the face amount" rather
than being stated as a separate rate

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Subsequent Measurement
• Subsequent to initial recognition, long-term notes receivable shall be
measured at the amortized cost using the effective interest method. The
amortized cost is in accordance with PFRS 9, paragraph 5.2.1

Amortized cost – the amount at which the note receivable is measured

initially:

 Minus principal repayment

 Plus or minus cumulative amortization of any difference between the initial
carrying amount and the principal maturity amount
 Minus reduction for impairment or uncollectability
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Illustration 1-Non-interest Bearing Note
On January 1, 2024, an entity sold an equipment with a cost of P250,000 for
P400,000. The buyer paid a down 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 present value of an ordinary annuity of 1 for three periods at 10% is
2.4869. The present value of the note is computed by multiplying the annual
installment of P100,000 by the present value factor of 2.4869 or P248,690

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Computation
Face value of note 300,000
Present value of note (100,000 x 2.4869) 248,690
Unearned interest income 51,310
Present value of note 248,690
Cash received-down payment 100,000
Sale price 348,690
Cost of equipment 250,000
Gain on sale of equipment 98,690

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Journal Entry for 2024
To record the sale of equipment
Cash 100,000
Note receivable 300,000
Equipment 250,000
Gain on sale of equipment 98,690
Unearned interest income 51,310

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Notes Receivable
Reference:
INTERMEDIATE ACCOUNTING 1 (VALIX)
For Educational Purposes Only