Prepared by: SHERWIN B.
SANTOS, CPA__
E-mail Address: _sherwin.santos@[Link].ph________
Central Luzon State University
Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course
ACCTG 2105 / Intermediate Accounting 1
Module
Topic 7 (Notes Receivable)
I. Objectives
At the end of the module, the following are expected:
a. Understand the concept and nature of notes receivable, the initial and
subsequent measurements.
b. Know the accounting for interest and non-interest bearing notes receivable.
II. Learning Activities
A note receivable is a written promise to receive a specific amount of cash from
another party on one or more future dates. This is treated as an asset by the
holder of the note. Overdue accounts receivable are sometimes converted into
notes receivable, thereby giving the debtor more time to pay, while also
sometimes including a personal guarantee by the owner or the debtor.
The payee is the party who receives payment under the terms of the note, and
the maker is the party obligated to send funds to the payee. The amount of
payment to be made, as listed in the terms of the note, is the principal. The
principal is to be paid on the maturity date of the note.
INITIAL MEASUREMENT
Short-term notes receivable is measured at face value and is not discounted.
Conversely, long-term notes receivable is measured initially at present
value which is the sum of all future cash flows discounted using the effective
interest rate for the same or similar notes.
ACCTG 2105 / Intermediate Accounting 1
Interest Bearing Notes
These notes are measured at face value which is actually the present value
upon issuance.
Illustration:
On January 1, 2019, QUINTA Company sold to PEPITO Company a land costing
P2,000,000, for P3,000,000. PEPITO Co. paid P1,000,000 down and signed a
two-year promissory note for the balance plus 10% interest that will be
compounded annually. The note matures at the beginning of 2021.
Journal entries (in the books of Quinta):
2019
Jan. 1 Cash 1,000,000
Notes receivable 2,000,000
Land 2,000,000
Gain on sale of land 1,000,000
Dec. 31 Accrued interest receivable 200,000
Interest income 200,000
(P2,000,000*10%)
2020
Dec. 31 Accrued interest receivable 220,000
Interest income 220,000
(P2,200,000*10%)
2021
Jan. 1 Cash 2,420,000
Notes receivable 2,000,000 Accrued interest receivable
420,000
Non-interest Bearing Notes
These notes are measured at present value or the discounted value of the future
cash flows using the effective interest rate. “Non-interest bearing” does not
mean that it does not have any interest. It simply means that the interest is
already included in the face amount of the note.
Illustration #1:
RUBI Company is a manufacturing company. On January 1, 2019, it sold a
machinery costing P200,000 for P300,000. The buyer signed a non-interest
bearing note for P300,000 to be paid in four equal installments every year-end.
The cash selling price of the machinery is P250,000.
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ACCTG 2105 / Intermediate Accounting 1
Solution:
Face value of note 300,000
Present value (cash selling price) 250,000
Unearned interest income 50,000
Journal entries for the current year:
(a) Notes receivable 300,000
Sales 250,000
Unearned interest income 50,000
To record the sale.
(b) Cash 75,000
Notes receivable 75,000
To record the first installment collection.
(c) Unearned interest income 20,000
Interest income 20,000
To recognize the unearned interest as income.
Computation of interest income:
Notes receivable Fraction Interest
income
(UII*fraction)
2019 300,000 3/7.5 20,000
2020 225,000 2.25/7.5 15,000
2021 150,000 1.5/7.5 10,000
2022 75,000 0.75/7.5 5,000
Total 750,000 50,000
Illustration #2:
On January 1, 2019, Ame Company sold to Carns Company an equipment
costing P500,000 for P750,000. Carns Company paid P150,000 as down payment
and signed a non-interest bearing note for P600,000 that is payable in three
equal installments of P200,000 every year-end.
Prevailing interest rate for similar notes 10% PV of an ordinary annuity
of 1 at 10% for 3 periods 2.4869
Computation:
Face value of note 600,000
Present value (200,000*2.4869) 497,380
Unearned interest income 102,620
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ACCTG 2105 / Intermediate Accounting 1
Present value of note 497,380
Cash received (down payment) 150,000
Sale price 647,380
Cost of equipment 500,000
Gain on sale of equipment 147,380
Journal entries for the current year:
(a) Cash 150,000
Notes receivable 600,000
Equipment 500,000 Gain on sale of equipment 147,380
Unearned interest income 102,620 To record the sale.
(b) Cash 200,000
Notes receivable 200,000 To record the first installment
collection.
(c) Unearned interest income 49,738
Interest income 49,738 To record the interest income.
Supporting computation:
Date Annual Interest Principal Present Value
collection income
(PV*int. rate)
Jan. 1, 2019 - - - 497,380
Dec. 31, 2019 200,000 49,738 150,262 347,118
Dec. 31, 2020 200,000 34,712 165,288 181,830
Dec. 31, 2021 200,000 18,170* 181,830 0
*adjusted
SUBSEQUENT MEASUREMENT
Long-term notes receivable are measured at amortized cost which will be
discussed in the succeeding module on Loan Receivable.
Reference:
Intermediate Accounting Volume 1, 2021 ed. by Valix, Peralta & Valix
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