Chapter 12

NOTES RECEIVABLE

Group 5
 Notes receivable are claims supported
by formal promises to pay usually in the
form of notes.

Negotiable promissory note is an

unconditional promise in writing made by one
DEFINITION person to another, signed by the maker,
engaging to pay on demand or at fixed
determinable future time a sum certain in
money to order or to bearer.

A promissory note is 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.
 The note may be payable on demand
or at a definite future date.

Stand alone, the term notes receivable

DEFINITION 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.
 When a promissory note matures and
is not paid, it is said to be dishonored.

Theoretically, dishonored notes shall be

DISHONORED removed from the notes receivable

NOTES account and transferred to accounts

receivable at an amount to include, if any,
interest and other charges.

Dishonored notes should be recorded

as follows:
Accounts receivable xx
Notes receivable xx
Interest income xx
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 ordinar y
claim against the
maker
 Conceptually, notes receivable
shall be measured initially at
present value.

INITIAL The present value is the sum of all

MEASUREMENT future cash flows discounted
OF NOTES using the prevailing market rate of
RECEIVABLE 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.

INITIAL Cash flows relating to short-term

MEASUREMENT notes receivable are not
OF NOTES discounted because the effect of
RECEIVABLE discounting is usually not material.

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.

It is simply a case of
Noninterest-bearing long-term notes are the interest being
measured at present value which is the included in the face
discounted value of the future cash flows value rather than
using the effective interest rate. being stated as a
separate rate.

Actually, the term noninterest-bearing is a

misnomer because all notes implicitly contain
interest.
Amortized cost effective interest method
is the amount at which the note receivable is
measured initially minus principal repayment, plus
or minus the cumulative amortization of any
difference between the initial carrying amount and
the principal maturity minusPV of reduction
1 =(1+r)-n
for
impairment or uncollectibility.
PV of ordinary annuity of 1= 1-(1+r)-n
r
For long-term noninterest-bearing notes receivable,
the amortized cost is the present value plus
amortization of the discount, or the face value minus
the unamortized unearned interest income.
Interest bearing note Noninterest bearing note
 PROBLEM 12-2

Feasible Company sold to another entity a tract of land costing P5,000,000 for
P7,000,000 on January 1, 2015. The buyer paid P1,000,000 down and signed a
two-year promissory note for the remainder of the purchase price plus 12%
interest compounded annually. The note matures on January 1, 2017.
Required:
Prepare journal entries for 2015, 2016 and 2017.
2015
Jan. 1 Cash 1,000,000
Note Receivable 6,000,000
Land 5,000,000
Gain on sale 2,000,000

Dec. 31 Accrued Interest receivable 720,000

Interest income 720,000
(6M x 12%)
2016
Dec. 31 Accrued Interest receivable 806,400
Interest income 806,400
(6,720,000 x 12%)

2017
Jan. 1 Cash 7,526,400
Note receivable 6,000,000
Accrued interest income 1,526,400
 PROBLEM 12-3

Bygone Company manufactures and sells computers. On January 1, 2015, the

entity sold a computer costing P400,000 for P600,000. The buyer signed a
noninterest bearing note for P600,000 payable in three equal installments every
December 31. The cash selling price of the computer is P540,000.

Required:
Prepare journal entries for the current year.
2015
Jan. 1 Note receivable 600,000
Sales 540,000
Unearned interest income 60,000

Dec. 31 Cash 200,000

Note receivable 200,000

Unearned interest income 30,000

Interest income 30,000

Year Notes receivable Fraction Interest income

2015 600,000 6/12 30,000
2016 400,000 4/12 20,000
2017 200,000 2/12 10,000
1,200,000 P60,000
PROBLEM 12 - 5
 Gullible Company is a dealer in equipment. On December 31, 2015, the entity sold an
equipment in exchange for a noninterest bearing note requiring five annual payments of
P500,000. The first payment was made on December 31, 2016. The market interest for
similar notes was 8%. The relevant present value factors are:

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

Required:

1. Prepare journal entries for 2015 & 2016.

2. Determine the carrying amount of the note receivable on December 31, 2016.

3. Determine the interest income for 2017.

DATE ANNUAL INTEREST PRINCIPAL PRESENT
COLLECTION INCOME VALUE
12/31/15 1 995 000
12/31/16 500 000 159 600 340 400 1 654 600
12/31/17 500 000 132 368 367 632 1 286 968
12/31/18 500 000 102 957 397 043 889 925
12/31/19 500 000 71 194 428 806 461 119
12/31/20 500 000 36 890 461 119 -

500 000 x 3.99 = 1,995,000

1 995 000 x 8% = 159,600

500,000 – 159,600 = 340,400

 12/31/15 Notes Receivable 2 500 000
Sales 1 995 000
Unearned Interest Income 505 000

First annual payment:

12/31/16 Cash 500 000
Notes Receivable 500 000

Interest Income:
12/31/16 Unearned Interest Income 159 600
Interest Income 159 600

Carrying amount 1 654 600 Interest Income 132 368

Problem 12-7
On January 1, 2015, Brutal Company sold land with carrying
amount of P7,000,000 in exchange for P9,000,000 noninterest
bearing note due January 1, 2018. There was no established
exchange price for the land. the prevailing interest rate for this
note on January 10, 2015 was 10%. The present value of 1 at
10% for the three periods is 0.75.

Required: Prepare journal entries for 2015, 2016, 2017 and

2018.
2015
Jan. 1 Note receivable 9,000,000
Loss on sale of Land 250,000
Land 7,000,000
Unearned Interest Income 2,250,000

PV of Note (9,000,000x0.75) 6,750,000

Carrying amount of Land (7,000,000)
Loss on Sale of LAnd (250,000)

2015
Dec.31 Unearned Interest Income 675,000
Interest Income 675,000

Carrying amount of the note 6,750,000

Interest rate 10%
Interest income for 2015 675,000
2016
Dec.31 Unearned Interest Income 742,500
Interest Income 742,500

Carrying amount of the note 7,425,000

Interest rate 10%
Interest income for 2015 742,500

2017
Dec.31 Unearned Interest Income 832,500
Interest Income 832,500

Unearned Interest Income 2,250,000

Less: Earned Interest Income 1,417,500
Interest income for 2015 832,500

2018
Jan. 1 Cash 9,000,000
Note Receivable 9,000,000
 Problem 12-9

Fame Company has an 8% note receivable dated June 30, 2014, in the
original amount of P1,500,000. Payments of P500,000 in principal plus
accrued interest are due annually on July 1, 2015, 2016 and 2017. In
June 30, 2016 statement of financial position, what amount should be
reported as a current asset for interest on the note receivable?

a. 120,000
✓b. 80,000
c. 40,000
Solution:
d. 0
Original principal P 1,500,000
Less: Principal payment on July 1, 2015 500,000
Balance as of July 1, 2016 1,000,000
x Interest rate 8%
Accrued interest- June 30, 2016 P 80,000
 Problem 12-10

On June 30, 2015, Pink Company sold goods for P5,000,000 and
accepted the customer’s 10% one-year note in exchange. The 10%
interest rate approximates the market rate of return. What amount
should be reported as interest income for the year ended December 31,
2015?

a. 500,000
✓b. 250,000 Interest income from July 1 to December 31, 2015:
c. 125,000 5,000,000 x 10% x 6/12 = P 250,000
d. 0
 Problem 12-11

On June 30, 2013, Green Company accepted a customer’s P2,500,000

noninterest-bearing six-month note in a sale transaction. The product
sold normally sells for P2,300,000. What amount should be reported as
interest revenue for the year end December 31, 2013?

✓a. 200,000
b. 100,000
c. 250,000 Interest Revenue:
d. 0 Notes Receivable- Face Amount P 2,500,000
Less: Normal Selling Price 2,300,000
P 200,000
 P. 389 PROBLEM 12-12

Touch company sold a piece of machinery with a list price of P1,600,000 to

Archer company on January 1, 2015. Archer Company issued a noninterest
bearing note of P1,700,000 due in one year. Touch Company normally sells this
type of machinery for 90% of list price. What amount should be recorded as
interest revenue for the year?
a. 100,000
b. 260,000
c. 160,000
d. 0
Notes receivable 1,700,000
Present value equal to cash price(1,600,000x90%) 1,440,000
Interest Revenue 260,000 B
 PROBLEM 12-13

On June 1, 2015,Yonder Company loaned P500,000 on a 12% note, payable in five

annual installments of P100,000 beginning January 1,2016. Interest on the note is
payable on the first day of each month beginning July 1,2015. The borrower made
timely payments through November 1, 2015. On January 1, 2016,the entity received
payment of the first principal installment plus all interest due. On December 31, 2015,
what amount should be reported as accrued interest receivable?
a. 0
b. 5,000
c. 10,000
d. 15,000
November 2015(500,000x1%) 5,000
December 2015(500,000X1%) 5,000
Accrued interest receivable 10,000 C
 PROBLEM 12-14

Judicious Company purchased a P2,000,000, 8%, five-year note that required five
equal annual year-end payments of P500,900. The note was discounted to yield a
9% rate to Judicious Company. At the date of purchase, the entity recorded the
note at the present value of P1,948,500.What is the total interest revenue
earned by the entity over the life of this note?
a. 504,500
b. 556,000
c. 800,000
d. 900,000
Total Payments (500,900x5) 2,504,500
Present value of note 1,948,500
Total interest Revenue 556,000 B
PROBLEM 12 - 17
On December 31, 2015, Humility Company sold a machine to another entity in exchange for a noninterest-
bearing note requiring ten annual payments of P500 000. The buyer made the first payment on December
31, 2015. The market interest rate for similar notes at date of issuance was 8%. Information on present
value factors is:

PERIOD PV OF 1 AT 8% PV OF ORDINARY ANNUITY OF 1 AT 8%

9 0.50 6.25

10 0.46 6.71

On December 31, 2015, what is the carrying amount of note receivable?

A. 2 250 000

B. 2 300 000
PV of remaining 9 payments (500 000 x 6.25) 3 125 000
C. 3 125 000

D. 3 355 000
The note receivable is shown at the present value on December 31, 2015.

Face value-remaining nine payments(500,000x9) 4,500,000

Present value (500,000 x 6.25) 3,125,000
C.
Unearned interest income P1,375,000
PROBLEM 12 - 18
On January 1, 2015,Akin Company sold an equipment with a carrying amount of P4 800 000 in exchange for
a P6 000 000 noninterest-bearing note due on January 1, 2018. There was no established exchange price for the
equipment. The prevailing rate of interest for a note of this type was 10%. The present value of 1 at 10% for 3 periods is
0.75.

1. In the income statement for 2015, what amount should be reported as interest income?

A. 600 000

B. 500 000 PV of note (6 000 000 x 0.75) 4 500 000

Rate 10%
C. 450 000
Interest 450 000
D. 90 000

2. In the income statement for 2015, what amount should be reported as gain or loss on sale of equipment?

A. 1 200 000 gain

B. 2 700 000 gain

C. 300 000 gain PV of note (6 000 000 x 0.75) 4 500 000

Carrying amount 4 800 000
D. 300 000 loss
Gain (loss) (300 000)
 2. Present value of note receivable 4,500,000
Carrying amount of equipment 4,800,000
Lossreceivable
1. Note on sale of equipment (P300,000) D.
6,000,000
PresentDate Interest income
value of note Unearned
receivable interest
(6,000,000 x
income
PresentValue
.75)4,500,000
Unearned interest income
Jan.1, 2015 1,500,000 4,500,000
Dec.31, 2015
P1,500,000 450,000 1,050,000 4,950,000
Dec.31, 2016 495,000 555,000 5,445,000
Dec.31, 2017 *555,000 - 6,000,000
Answer: C.
PROBLEM 12 - 21
Persevere company is a dealer in equipment. On December 31, 2015, the entity sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500 000. The first payment was
made on December 31, 2016.
DATE ANNUAL INTEREST PRINCIPAL PRESENT
COLLECTION INCOME VALUE

The market interest rate for similar notes was 8%.The relevant present value factors 1
12/31/15 are:
995 000
12/31/16 500 000 159 600 340 400 500
1 000
654 x 3.99
600
12/31/17 500 000 132 368 367 632 1 286 968
PV of 1 at 8% for 5 periods 0.68
12/31/18 500 000 102 957 397 043 889 925
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
12/31/19 500 000 71 194 428 806 461 119
12/31/20 500 000 36 890 461 119 -
1. On December 31, 2015, what is the carrying amount of note receivable?

A. 2 500 000

B. 1 995 000

C. 1 700 000

D. 1 495 000
2.What amount of interest income should be reported for 2016?

A. 505 000
DATE ANNUAL INTEREST PRINCIPAL PRESENT
COLLECTION INCOME VALUE
B. 101 000
12/31/15 1 995 000
C. 159 600
12/31/16 500 000 159 600 340 400 1 654 600
D. 119 600 12/31/17 500 000 132000
1 995 368x 8% 367 6321995 000
1 286 968400
– 340
12/31/18 500 000 102 957 397 043 889 925
3. What is the carrying amount of the note receivable on December 31, 2016?
12/31/19 500 000 71 194 428 806 461 119
A. 1 654 600 12/31/20 500 000 36 890 461 119 -

B. 2 154 600

C. 2 000 000

D. 1 495 000
Passion Company sold machinery on January 1, 2015 for which the cash selling price was P758,200. The buyer
entered into an installment sale contract at an implicit interest rate of 10%. The contract required payment of
PROBLEM
P200,000 a year over 5 years with the first payment 12-2431, 2015. What amount of interest income
due on December
should be reported in 2016?

a. 100,000
b. 75, 820
c. 63,402
d. 0
 Date Annual Collection Interest Income Principal Present value
Jan.1, 2015 758,200
Dec. 31, 2015 200,000 75,820 124,180 634,020
Dec. 31, 2016 200,000 63,402 136,598 497,422
Dec. 31, 2017 200,000 49,742 150,258 347,164
Dec. 31, 2018 200,000 34,716 165,284 181,880
Dec. 31 2019 200,000 18, 188 181,880 -

Answer: C
Audible Company sold a factory on January 1, 2015 for P7,000,000. The
entity received a cash downPROBLEM
payment of12-25
P1,000,000 and a 4-year, 12%
note receivable for the balance. The note is payable in equal annual
payments of principal and interest of P1,975,000 payable on December
31 of each year until 2018. What is the carrying amount of the note
receivable on December 31, 2015?
a. 4,500,000
b. 4,744,600
c. 4,624,600
d. 4,025,600
Note receivable-January 1, 2015 6,000,000
Principal payment on Dec. 31, 2015
Annual payment 1,975,400
Interest (12% x6,000,000) (720,000) 1,255,400
Carrying amount-December 31, 2015 P4,744,600 B.

Date Annual Collection Interest income Principal Carrying amount

Jan.1, 2015 6,000,000
Dec. 31, 2015 1,975,400 720,000 1,255,400 4,744,600
Dec. 31, 2016 1,975,400 569,352 1,406,048 3,338,552
Dec. 31, 2017 1,975,400 400,626 1,574,774 1,763,778
Dec. 31, 2018 1,975,400 211,653 1,763,778 -
On December 27, 2015, Languid Company sold a building, receiving as consideration a P4,000,000 noninterest
bearing note due in three years. The building had a cost of P3,800,000 and the accumulated depreciation was
PROBLEM
P1,600,000 at the date of sale. The prevailing rate of interest 12-26
for a note of this type was 12%. The present value
of 1 for three periods at 12% is 0.71. What amount should be reported as gain on sale for the current year?
a. 1,800,000
b. 640,000
c. 200,000
d. 0

Present value of note receivable(4,000,000x 0.71) 2,840,000

Carrying amount of building (2,200,000)
Gain on sale P640,000 B.
 THANK YOU

Prepared by:
Conejos, Haspe Maria G.
Jamito, Gil
Sumagang, Irish Mahra