Prepared by: Ms. HAZEL JADE E.

VILLAMAR
E-mail Address: _hazeljade.villamar@clsu2.edu.ph________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 2105 / Intermediate Accounting 1

Module 2
TOPIC 3 (NOTES RECEIVABLE)

Overview

This course covers the detailed discussion, appreciation, and application of

the Philippine Financial Reporting Standards (PFRS) on the assets, financial and
non-financial of a business enterprise. Emphasis is given on the interpretation and
application of the accounting standards on Financial Assets and their required
disclosures. The related internal control, ethical issues and management of assets
are also covered. Exposure to computerized system in receivables, inventory and
lapsing schedules is a requirement.

I. Objectives

At the end of the module, the following are expected:

A. Identify the proper presentation of receivables as either current or noncurrent assets.

B. State the timing of recognition and measurement of trade and other receivables.

C. Prepare amortization tables.

D. Account for impairment of receivables.

II. Learning Activities

NOTES RECEIVABLE

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 of 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.

INTEREST BEARING NOTES

These notes are measured at face value or the present value upon
issuance.

ILLUSTRATION

On January 1, 2019, Happy Company sold to Life Company a land costing

P2,000,000, for P3,000,000. Life 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:
 2019
Jan. 1 Cash P1,000,000
Notes receivable P2,000,000
Land P2,000,000
Gain on sale of land P1,000,000

Dec. 31 Accrued interest receivable P200,000

Interest income P200,000

(P2,000,000*10%)
2020
Dec. 31 Accrued interest receivable P220,000
Interest income P220,000

(P2,200,000*10%)
2021
Jan. 1 Cash P2,220,000
Notes receivable P2,000,000
Accrued interest receivable P220,000

NON-INTEREST BEARING NOTE

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)
Ichibi 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.

Face value of note P300,000

Present value (cash selling price) P250,000
Unearned interest income P 50,000
Selling price P250,000
Cost of machinery P200,000
Gross income P 50,000
 To record the sale:
Notes receivable P300,000
Sales P250,000
Unearned interest income P 50,000

To record the first installment collection:

Cash P 75,000
Note receivable P 75,000

To recognize the unearned interest as income:

Unearned interest income P 20,000
Interest income P 20,000

Journal entries for the current year:

Computation of interest income:

Notes receivable Fraction Interest income
2019 300,000 4/10 (50,000*4/10) = 20,000
2020 225,000 3/10 (50,000*3/10) = 15,000
2021 150,000 2/10 (50,000*2/10) = 10,000
2022 75,000 1/10 (50,000*1/10) = 5,000
750,000 50,000

ILLUSTRATION (2)

On January 1, 2019, Anime Company sold to Cartoons Company an

equipment costing P500,000 for P750,000. Cartoons 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 (P200,000*2.4869) 497,380
Unearned interest income 102,620
Present value of note 497,380
Cash received 150,000
Sales price 647,380
Cost of equipment 500,000
Gain on sale of equipment 147,380

Date Annual Interest Principal Present Value

Collection Income

1/1/2019 497,380
12/31/2019 200,000 49,738 150,262 (497,380-150,262)
(497,380*10%)
(200,000- 347,118
49,738)
12/31/2020 200,000 34,712 165,288 (347,118-165,288)
(347,118*10%) (200,000- 181,830
34,712)
12/31/2021 200,000 18,170 181,830 0
Journal entries for the current year:

To record the sale:

Cash P150,000
Notes receivable P600,000
Equipment P500,000
Gain on sale of equipment P147,380
Unearned interest income P102,620

To record the first installment collection:

Cash P200,000
Note receivable P200,000

To record the interest income:

Unearned interest income P49,738
Interest income P49,738

SUBSEQUENT MEASUREMENT

Long-term notes receivable is measured at amortized cost which is will be

discussed in the succeeding chapter. On January 1, 2019, Naruto Company sold
to Sasuke Company a land costing P2,500,000 for P3,500,000.
Reference
Intermediate Accounting Volume 1, 2019 by Valix, Peralta & Valix