Illustration 1 – Interest bearing note

Taopo owned a tract of land costing P700,000 and sold thr land for P1,100,00. The entity received a 3
year note for P 1,100,000 plus interest 10% compounded annually.
Year 1
Account Title Dr Cr
Notes Receivable 1,100,000
Land 700,000
Gain on Sale 400,000

Account Title Dr Cr
Accrued Interest Receivable 110,000
Interest Income 110,000

*1,100,000 x 10% = P110,000

Year 2

Account Title Dr Cr
Accrued Interest Receivable 121,000
Interest Income 121,000

*Face Value 1,100,000

Interest accrued for 1st year 110,000
Total 1,210,000

Interest for 2nd year (10% x 1,210,000) = P121,000

Year 3 (collection)

Account Title Dr Cr
Cash 1,461,100
N/R 1,100,000
Accrued Interest Receivable 231,000
Interest Income 133,100

*Accrued Interest Receivable – 110,000 + 121,000 = 231,000

*Face Value 1,100,000

Interest accrued for 1st year 110,000
Interest Accrued for 2nd year 121,000
Total 1,331,000

Interest for 3rd year ( 10% x 1,331,000) = 133,100

Illustration 2 – Non-bearing note
Azarcon manufacturers and sells machinery, On January 1 2020, the entity sold machinery costing P
250,000 for P 420,000, the buyer signed a noninterest bearing note for P 420,000 payable in three equal
annual installments every December 31, The cash price of the machinery is P 330,000.

Face Value of note 420,000

Less: Present Value 330,000
Unearned Interest Income 90,000

Cash price 330,000

Less: Cost of machinery 250,000
Gross income 80,000

420,000 x 3 years = 140,000 yearly

Amortization Schedule for unearned interest income

Year N/R Fraction Interest Income
2020 420,000 420/840 45,000
2021 280,000 280/840 30,000
2022 140,000 140/840 15,000
840,000 90,000

Fractions
420/840 x 90k = 45,000
280/840 x 90k = 30,000
140/840 x 90k = 15,000

FS Classification
December 31 2020 (after collection of P 140,000)
Date Gross Unearned Interest Present Value Classification
2021 140,000 30,000 110,000 Current Asset
2022 140,000 15,000 125,000 Non-Current Asset

 PV = Gross – Unearned interest

140k – 30k = 110k
140k – 15k = 125k

Journal Entries

2020
To record sales:
Notes Receivable 420,000
Sales 330,000
Unearned Interest Income 90,000
 2020
To record the 1st installment collection:
Cash 140,000
Notes Receivable 140,000

To recognized Interest Income:

Unearned Interest Income 45,000
Interest Income 45,000

2021
To record the 2nd installment collection:
Cash 140,000
Notes Receivable 140,000

To recognized Interest Income:

Unearned Interest Income 30,000
Interest Income 30,000

2022
To record the 3rd installment collection:
Cash 140,000
Notes Receivable 140,000

To recognized Interest Income:

Unearned Interest Income 15,000
Interest Income 15,000

Illustration3 – Noninterest bearing note

On January 1 2020Manrique sold an equipment with a cost of P 230,000 for P420,000, the buyer paid a
down payment of P 120,000 and signed a noninterest bearing note for P 300,000 payable in equal
annual installment every December 31. The prevailing interest rate for note of this type is 10%. The
present value of ordinary annuity of 1 for 3 periods at 10% is 2.4869.

300,000/3 years = 100,000 – noninterest bearing note yearly

Face value 300,000

Less: 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
Sales price 348,690
Less: Cost of equipment 230,000
 Gain on sale of equipment 118,690
Amortization Schedule using effective interest method.
Date Annual Collection Interest Income Principal Present Value
1/12020 248,690
12/31/2020 100,000 24,869 75,131 173,559
12/31/2021 100,000 17,356 82,624 90,915
12/31/2022 100,000 9,085 90,915

1/1/2020 (Present Value) 100k x 2.4869 = 248,690

Interest income: Principal Present Value

248,690 x 10% = 24,869 100k - 24,869 = 75,131 248,690 - 75,131 = 173,559
173,559 x 10% = 17,356 100k - 17,356 = 82,624 173,559 - 82,624 = 90,915
100k – 90,915 = 9,085 100k -9,085 = 90,915

FS Classification
December 31 2020 (after collection of P 140,000)
Date Gross Unearned Interest Present Value Classification
1/31/2021 100,000 17,356 82,624 Current Asset
12/31/2022 100,000 9,085 90,915 Non-Current Asset

Journal Entries

2020
To record sales:
Cash 100,000
Notes Receivable 300,000
Equipment 230,000
Gain on sale of equipment 118,690
Unearned Interest Income 51,310

2020
To record the 1st installment collection:
Cash 100,000
Notes Receivable 100,000

To recognized Interest Income:

Unearned Interest Income 24,869
Interest Income 24,869
2021
To record the 2nd installment collection:
Cash 100,000
Notes Receivable 100,000
 To recognized Interest Income:
Unearned Interest Income 17,356
Interest Income 17,356

2022
To record the 3rd installment collection:
Cash 100,000
Notes Receivable 100,000

To recognized Interest Income:

Unearned Interest Income 9,085
Interest Income 9,085

Lacsi manufacturers and sells computer, on January 1 2029 the entity sold a computer costing P 750,000
for P 900,000, the buyer signed a noninterest bearing note for P 900,000 payable in three equal annual
installments every December 31. The cash selling price of the computer is P 840,000.

Annual – 900k/3years = 300k yearly

Face value 900,000

Less: Present Value of note 840,000
Unearned Interest Income 60,000

Amortization Schedule for unearned interest income

Year N/R Fraction Interest Income
2020 900,000 900/1.8 30,000
2021 600,000 600/1.8 20,000
2022 300,000 300/1.8 10,000
1.8 million 60,000

Fractions
900/1.8 x 60k = 30,000
600/1,8 x 60k = 20,000
300/1.8 x 60k = 10,000

Journal Entries

2020
To record sales:
Notes Receivable 900,000
Sales 840,000
Unearned Interest Income 60,000
 2020
To record the 1st installment collection:
Cash 300,000
Notes Receivable 300,000

To recognized Interest Income:

Unearned Interest Income 30,000
Interest Income 30,000

2021
To record the 2nd installment collection:
Cash 300,000
Notes Receivable 300,000

To recognized Interest Income:

Unearned Interest Income 20,000
Interest Income 20,000

2022
To record the 3rd installment collection:
Cash 300,000
Notes Receivable 300,000

To recognized Interest Income:

Unearned Interest Income 10,000
Interest Income 10,000

Gonzales Company is a dealer in equipment, on December 31, 2017 the entity sold an equipment in
exchange for a noninterest bearing note requiring 5 annual payments of P 600,000. The first payment
was made on December 31, 2018, the market interest for similar notes was 12%. The relevant present
value factors are:

Present value (PV) of 1 at 12% for 5 periods 0.5674

PV of an ordinary annuity of 1 at 12% for 5 periods 3.6048

Face value (600k x 5 years) 3,000,000

Less: Present Value of note (600k x3.6048) 2,162,880
Unearned Interest Income 837,120
Amortization Schedule using effective interest method.
Date Annual Collection Interest Income Principal Present Value
12/31020 2,162,880
12/31/2028 600,000 259,546 340,454 1,822,426
12/31/2019 600,000 218,691 381,309 1,441,117
12/31/2020 600,000 172,934 427,066 1,014,051
12/31/2021 600,000 172,934 478,314 535,737
12/31/2022 600,000 64,263 535,737

Interest Income: Principal: Present Value

2,162,880 x 12% = 259,546
1,822,426 x 12% = 218,691
1,441,117 x 12% = 172,934
1,014,051 x 12% = 64,263
600k – 259,546 = 340,454
600k – 218,691 = 381,309
600k –172,934 = 427,066
600k -172,934 = 478,314
600k - 64,263 = 535,737
2,162,880 - 340,454 = 1,822,426
1,822,426 - 381,309 = 1,441,117
1,441,117 - 427,066 =1,014,051
1,014,051 - 478,314 = 535,737

Date Annual Collection Interest Income Present value Classification

12/31/2017
12/31/2018 600,000 259,546 340,454 Current Asset
12/31/2019 600,000 218,691 381,309 Non-current
12/31/2020 600,000 172,934 427,066 asset
12/31/2021 600,000 172,934 478,314
12/31/2022 600,000 64,263 535,737
2.4 million 577,574 1,822,426