Chapter 6

Notes Receivable

Notes receivable — claims supported by formal

promises (notes)
Negotiable promissory note — payable on demand/ at a
definite future date
Maker—promises to pay another person —known as the
payee, a definite sum of money

*Notes receivable—represents only claims from sale of

goods/services
*Notes received from officers, employees, shareholders and
affiliates shall be designed separately

Notes Receivable
Interest-bearing note receivable: Face
amount
Noninterest-bearing notes receivable:
Initial Present value
Short-term notes receivable: Face amount

*Effective interest rate/discount rate

Amortized Cost

a. Minus principal repayment

Subsequent
b. Plus/minus cumulative amortization
c. Minus reduction for impairment or
uncollectability
*When a promissory note matures and is not paid, it will be
dishonored—and will be transferred to accounts receivable.
*The amount debited to AR should include face amount,
interest, and other charges.

Interest-bearing notes receivable

—measured at face amount, the present value upon
issuance

Noninterest-bearing notes receivable

—measured at present value (discounted value of the
future cash flows), using the effective interest rate.

*All notes implicitly contain interest. Interest is already

included in the face amount of a noninterest-bearing
notes receivable.

Example: Interest bearing note

Land costs P800,000
Sold the land for P1,000,000
—received a 3-year note for P1,000,000 plus interest of
12% compounded annually.