Notes Receivable
Notes Receivable - are claims supported by formal promises to pay usually in the form of notes. It is a
written contract in which one person promises to pay another person a definite sum of money.
Notes Receivable versus Loans Receivable versus Bonds Receivable:
Area of Comparison Notes Receivable Loans Receivable Bonds Receivable
Holder of the Non-bank Non-financial Bank or financial Investors (company
receivable institution institution with excess funds)
Written document Promissory note Promissory note Bond indenture
Usual reason of Sale of goods, services, Lending of cash to Lending of cash for
issuance or PPE debtors in ordinary passive income
course of business
Short Term Notes Receivable:
Conceptually, notes receivable shall be measured initially at present value of future cash receipts and
subsequently measured at present value of remaining future cash receipts. However, short-term notes
receivable is practically measured at face value since the effect of discounting is usually not material.
Accounting for Notes Receivable:
Initially, notes receivable are measured at fair value since no transaction cost are being paid
when notes are being issued. Fair value of the note is equal to the present value of future cash
receipts.
Subsequently, notes are measured at amortized cost using the effective interest method. The
amortized cost is also equal to the present value of remaining future cash receipts at year-end.
Interest income is equal to the effective interest which is computed by multiplying the effective
interest rate to the carrying amount of the notes at the beginning of the period.
Interest receivable is equal to the nominal interest of the note for the unpaid portion of the
year. This is computed by multiplying the face amount to the nominal interest rate less any
payments during the period.
Non-current portion of the Notes receivable, is equal to the present value of principal and
nominal interest payment beyond one year from the reporting date.
Current portion of the Notes receivable, is equal to the present value of principal and nominal
interest payment within year from the reporting date.
Notes Receivable
SALES REVENUE
If what was sold are inventory or service, the sales or revenue is measured at total fair value of
consideration received.
Three Types of Notes:
The accounting for the Notes receivable will depend on the type of notes received. The following are the
different types of note:
Nominal Interest (NI)
Effective Interest (El)
1. Interest Bearing
2. Noninterest Bearing
3. Interest-Bearing with Unrealistic Nominal
Interest
Effective Interest Rate:
As a general rule, the nominal interest is equal to the effective interest. Exception to the rule:
The note is noninterest-bearing.
Fair value of consideration given up is not equal to the face amount of the note.
In the above exception, the effective interest rate should be computed if not given in the problem using
trial and error and interpolation if necessary.
Notes Receivable
1. INTEREST BEARING NOTE
Since the nominal interest and effective interest are equal, there is no premium nor discount and the
present value of the note is equal to the Face amount.
2. NON-INTEREST-BEARING NOTE
a. Initial measurement (Fair value) - Financial asset is initially measured at fair value; the fair value of a
Note receivable is equal to the present value of future cash receipts. If the note is non- Interest bearing,
the only future cash receipt is the principal (no nominal interest).
b. Subsequent measurement (Amortized cost) Subsequent measurement of long-term receivable is
amortized cost. The starting point of amortization is the initial measurement and subsequently increase
by the effective interest earned and will be decreased by the collection of the principal.
c. Interest income (Effective interest) - The basis of the effective interest is the carrying amount of the
Note receivable at the beginning of the period. You can amortize the Note to compute for the carrying
amount at the beginning.
d. Interest receivable - zero
Notes Receivable
e. Non-current portion of Note receivable - If the note is Term note, it will be classified as either fully
current asset or fully non-current asset depending on the maturity date. However, if the note is Serial
note, it has both current and non-current portion and separation of which is necessary.
The non-current portion is the amortized cost of the note after one year. This is the portion of the note
that is not collectible after a year.
f. Current portion of the Note receivable - This is equal to the residual of the carrying amount of the
Note after deducting its non-current portion. This is also the decreased in carrying amount of the Note
after one period.
ILLUSTRATION 1 (Non-Interest Bearing-Term Note)
On January 1, 2022, KAYANIYOYAN Company sold equipment with a carrying amount of P4,800,000 in
exchange for P6,000,000 noninterest-bearing note due January 1, 2025. There was no established
exchange price for the equipment. The prevailing interest rate for this note was 10%. The present value
of 1 at 10% for three periods is 0.75.
Q1: What is the carrying amount of the note receivable on January 1, 2022?
A. 4,950,000 C. 6,000,000
B. 4,500,000 D. 4,800,000
Q2: What amount should be reported as gain or loss on sale of equipment in 20227
A. 1,200,000 gain C. 300,000 gain
B. 2,700,000 gain D.300,000 loss
Q3: What is the carrying amount of the note on December 31, 20227
A. 4,950,000 C. 6,000,000
B. 4,500,000 D. 4,800,000
Q4: What amount should be reported as interest income for 20227
A. 600,000 C. 528,000
B. 500,000 D. 450,000
Q5: What amount should be reported as Interest Income for 20237
A. 480,000 C. 528,000
B. 495,000 D. 500,000
Notes Receivable
ILLUSTRATION 2 (Non-Interest Bearing-Serial Note)
On January 1, 2022 GALINGANNIYO Company sold a building for P5,000,000 to KAYAKO Company.
KAYAKO Company paid P500,000 down and signed a noninterest bearing note for the balance which is
payable in three equal annual installments every December 31 of each year.
The carrying amount of the building is P4,200,000. Assume prevailing interest rate for a note of this
type is 12%
Present value of 1 at 12% for 3 periods 0.7118
Present value of ordinary annuity at 12% for 3 periods 2.4018
Q1: How much is the gain or loss on sale of building?
A. 597,300 C. 800,000
B. 97,300 D. 300,000
Q2: The carrying amount of notes on December 31, 2022 is
A. 3,000,000 B. 3,602,700
C. 2,535,024 D. 4,035,024
Q3: How much is the interest income for the year 2022?
A. 600,000 B. 492.324
C. 432,324 D. 540,000
Q4: The non-current portion of notes on December 31, 2022 is
A. 1,500,000 B. 1,067,676
C. 1,195,797 D. 1,339,227
Q5: The current portion of notes on December 31, 2022 is
A. 1,500,000 B. 1,067,676
C. 1,195,797 D. 1,339,227
3. INTEREST BEARING WITH UNREALISTIC NOMINAL RATE
a. Initial measurement (Fair value): The fair value of this type of Note is equal to the Present value of
the Principal and Nominal interest.
Notes Receivable
b. Subsequent measurement (Amortized cost): The starting point of amortization is the initial
measurement and subsequently increase by the effective interest earned and will be decreased by the
Nominal interest (paid or unpaid) and collection of principal (for serial notes).
c. Interest income (Effective interest) - The basis of the effective interest is the carrying amount of the
Note receivable at the beginning of the period. You can amortize the Note to compute for the carrying
amount at the beginning.
d. Interest receivable - The interest receivable is equal to the nominal interest for the portion unpaid.
e. Non-current portion of Note receivable - The non-current portion is the amortized cost of the Note
after one year. This is the portion of the Note that is not collectible after a year
f. Current portion of the Note receivable - This is equal to the residual of the carrying amount of the
Note after deducting its non-current portion. This is also the decreased in carrying amount of the Note
after one period.
ILLUSTRATION 3 (Interest Bearing with Unrealistic Nominal Rate-Term Note)
Notes Receivable
On January 1, 2022, Rizal Company finished consultation services and accepted in exchange a
promissory note with a face value of P200,000, due date of December 31, 2024, and a stated rate of 5%,
with interest receivable at the end of each year.
The fair value of the services is not readily determinable and the note is not readily marketable. Under
the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The
following interest factors are provided:
Q1: What is the amount of consultation service revenue to be present in the company's income
statement?
A. 175,133 B. 150,264
C. 24,869 D. 200,000
Q2: What is the carrying value of notes as of December 31, 20237
A. 190,909 B. 182,646
C. 175,133 D. 200,000
Q3: What is the amount of interest income for the year 2022?
A. 17,513 B. 10,000
C. 20,000 D. 7,513
Q4: The non-current portion of notes on December 31, 2022 is
A. 200,000 B. 175,133
C 190,909 D. 182,646
Q5: The current portion of notes on December 31, 2022 is
A. 200,000 8. 175,133
C. 190,909 D. 0
ILLUSTRATION 4 (Interest Bearing with Unrealistic Nominal Rate - Serial Note)
Notes Receivable
On January 1, 2022, Stain Company sold a delivery equipment costing P2,000,000 with accumulated
depreciation of P150,000 in exchange of a three year, 10%, P1,800,000 interest bearing note. The note is
collectible in equal annual amount starting December 31, 2022 including interest.
The prevailing rate of interest of similar note on this date was at 12%. The following interest factors are
provided:
Q1: How much is the loss on sale of equipment?
A.259,500 B.109,700
C. 131,150 D. 200,000
Q2: How much is the carrying amount of the note on December 31, 2022?
A. 1,349,136 B. 1,769,136
C.1,200,000 D. 1,169,136
Q3: How much is the interest income in 2022?
Α. 198,194 B. 174,030
C. 208,836 D. 180,000
Q4: How much is the current portion of the note on December 31, 2022?
Α. 639,704 B. 579,704
C. 589,432 D. 600,000
Q5: How much is the noncurrent portion of the note on December 31, 2022?
A. 529,244 B. 579,704
C. 589,244 D. 20,287
