No. 125 Brgy.
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@[Link]
Notes Receivable
INTRODUCTION
A note 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.
CLASSIFICATION OF NOTES RECEIVABLE
Entities classify notes as either:
1. Interest-bearing notes – they have a stated interest rate i.e., the contracted interest rate stated on the promissory note.
Other terms for stated interest rate include nominal rate, coupon rate, and face rate.
2. Noninterest-bearing notes – they do not have a stated interest rate because they include the interest element as part of the
face amount.
Trade vs. Nontrade classification
1. Trade notes receivable – these are promissory notes received from sale of goods or services in the ordinary course of business.
2. Nontrade notes receivable – these are promissory notes received from sources other than sale of goods or services in the
ordinary course of business.
INITIAL MEASUREMENT
Receivables are initially measured at fair value plus transaction costs. For measurement purposes, receivables are classified into
the following:
1. Short-term receivable
2. Long-term receivable that bears no interest (noninterest bearing note)
3. Long-term receivable that bears a reasonable interest rate.
4. Long-term receivable that bears an unreasonable interest rate.
Short-term receivable
The fair value of a short-term receivable may be equal to its face amount. However, if the transaction contains a significant
financing component, the fair value of the short-term receivable is equal to its present value.
Long-term receivable
1. Long-term receivable that bears a reasonable interest rate
FAIR VALUE = Face amount
2. Long-term receivable that bears no interest rate
FAIR VALUE = Present value of future cash flows discounted using an imputed interest rate.
3. Long-term receivable that bears an unreasonable interest rate
FAIR VALUE = Present value of future cash flows discounted using an imputed interest rate.
Other terms for imputed rate of interest include effective interest rate, market rate, and yield rate. The difference between the present
value and the face amount is initially recognized as unearned interest and subsequently recognized as interest income under the
effective interest method.
FINANCIAL ACCOUNTING AND REPORTING (FAR) PROBLEMS
Problem 1:
On January 1, 2023, Evanescence Corporation sold a machinery costing P380,000 with accumulated depreciation of P160,000 on the
date of sale. Evanescence received a P400,000 non-interest-bearing note, due January 1, 2026. There was no established exchange price
for the machinery and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2023, was 10%.
The present value of 1 at 10% for three periods is 0.75.
1. In the 2023 profit or loss, how much should be reported as interest revenue?
A. P40,000
B. P33,000
C. P30,000
D. P13,500
2. What is the note's carrying amount on December 31, 2023?
A. P340,000
B. P330,000
C. P300,000
D. P135,000
3. Assuming that the equipment was sold, and the note described in the problem was received on July 1, 2023, all
other data being the same, what is the interest revenue for the year ended December 31, 2023?
A. P15,000 C. P20,000
B. P16,500 D. P30,000
1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@[Link]
Problem 2:
On January 1, 2023, Fire Company sold an equipment to Water Company which had a carrying value on Fire's books of P100,000. Water
gave Fire a P600,000, non-interest-bearing note, payable in five equal annual installments of P120,000 with the first payment due on
December 31, 2023. There was no established price for the equipment and the note has no ready market value.
The prevailing rate of interest for a similar note on January 1, 2023, was 12%. Present value (PV) factors for 5 periods at 12% are as
follows:
PV of 1 – 0.57
PV of an ordinary annuity of 1 – 3.60
1. The interest revenue for 2023 is
A. P72,000
B. P57,600
C. P51,840
D. P14,400
2. How much is the amortized cost of the notes receivable at December 31, 2023?
A. P483,840
B. P432,000
C. P363,840
D. P236,540
Problem 3:
On January 1, 2023, Evelyn Company sold land that originally cost P400,000 to the Emily Company. As payment, Emily gave Evelyn a
P600,000 note. The note bears an interest rate of 8% and is to be repaid in three annual installments of P200,000 plus interest on the
outstanding balance. The first payment is due on December 31, 2023. The market price of the land is not reliably determinable. The
prevailing interest rate for notes of this type is 8%.
1. How much is the gain on the sale of land?
A. P400,000
B. P200,000
C. P103,105
D. P66,667
2. How much is the interest revenue for the year 2023?
A. P 48,000
B. P 32,000
C. P 16,000
D. Zero
Assume the same facts given in the problem but change the prevailing interest rate for notes of this type to 12% (instead of 8%).
3. At how much should the note be recorded on January 1, 2023?
A. P 600,000
B. P560,114
C. P480,360
D. P427,080
4. How much is the interest revenue for the year 2023?
A. P67,214
B. P57,643
C. P51,250
D. P48,000
5. What is the amortized cost of the receivable on December 31, 2023?
A. P 600,000
B. P 400,000
C. P 379,328
D. P 290,003
FINANCIAL ACCOUNTING AND REPORTING (FAR) THEORIES
1. Which of the following rates may be used to compute for the interest income on a receivable?
A. Stated rate
B. Effective rate
C. Either A or B
D. Neither A nor B
2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@[Link]
2. Which of the following rates may be used to compute for the interest receivable on a note receivable?
A. Stated rate
B. Effective rate
C. Either A or B
D. Neither A nor B
3. Total interest income recognized over the life of a noninterest bearing note is
A. Zero.
B. Greater than the total interest received on the note.
C. Less than the total interest received on the note.
D. Equal to the unearned interest income on initial recognition.
4. Which of the following items are true about discount on notes receivable?
I. The face value of the note is higher than its present value
II. The present value of the note is higher than its face value
III. The nominal rate is higher than the effective rate
IV. The effective rate is higher than the effective rate
A. I and III B. I and IV
C. II and III D. II and IV
5. On July 1 of the current year, a company obtained a two-year 8% note receivable for services rendered. At that time, the market
rate of interest was 10%. The face amount of the note and the entire amount of interest are due on the date of maturity.
Interest receivable on December 31 of the current year was
A. 5% of the face amount of the note. B. 4% of the face amount of the note.
C. 5% of the present value of the note. D. 4% of the present value of the note.
END OF HANDOUT
3|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
