NOTES RECEIVABLE ● The computation corresponding entry shall be as follows:

✓ Claims supported by formal promises to pay usually in the form of notes.

✓ Standing alone, the term “notes receivable” 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.

Initial measurement
● Conceptually, notes receivable shall be measured initially at present value.
● However, short-term notes receivable shall be measured at face value.
o Cash flows relating to short-term notes receivable are not
discounted because the effect of discounting is usually not
material.
● Interest-bearing notes receivable ● The interest receivable shall be written off if interest income already
o Measured at face value which is actually the present value upon recognized shall not be realized meanwhile the allowance shall be deducted
issuance. from the current balance of the notes receivable.
● Noninterest-bearing notes receivable
o Measured at present value which is the discounted value of the - - END - -
future cash flows using the effective interest rate.
RECEIVABLE FINANCING
Subsequent measurement THEORY
● Subsequent to initial recognition, long-term notes receivable shall be
measured at amortized cost using the effective interest method. 1. Which of the following is a method to generate cash from accounts
receivable?
Meaning of amortized cost a. Assignment only c. Both A and B
● The “amortized cost” is the amount at which the note receivable is measured b. Factoring only d. Neither A nor B
initially:
✓ Minus principal repayment 2. The equity of the assignor in assigned accounts is equal to
a. assigned accounts receivable
✓ Plus or minus cumulative amortization of any difference between the initial b. bank loan balance
carrying amount and the principal maturity amount c. assigned accounts receivable minus the bank loan balance
✓ Minus reduction for impairment or uncollectibility d. bank loan balance minus the assigned accounts receivable

● For long-term noninterest-bearing notes receivable, 3. It is a predetermined amount withheld by a factor as a protection against
the amortized cost is the present value plus customer returns, allowances and other special adjustments
amortization of the discount, or the face value minus a. Equity in assigned accounts c. Commission
the unamortized unearned interest income. b. Service charge d. Factor’s holdback

LOAN RECEIVABLE
● A financial asset arising from a loan granted by a bank or other financial
institution to a borrower or client.
Initial measurement
● At initial recognition, an entity shall measure a loan receivable at fair value
plus transaction costs that are directly attributable to the acquisition of the
financial asset.
● Transaction costs that are directly attributable to the loan receivable include
direct origination costs.
✓ Direct origination costs should be included in the initial measurement of the
loan receivable.
✓ However, indirect origination costs should be treated as outright expense.
Subsequent measurement
● PFRS 9 provides that if the business model in managing financial assets is
to collect contractual cash flows on specified dates and the contractual cash
flows are solely payments of principal interest, the financial asset shall be
measured at amortized cost.
● Accordingly, a loan receivable is measured at amortized cost using the
effective interest method.
Origination fees
● Lending activities usually precede the actual disbursement of funds and
generally include efforts to identify and attract potential borrowers and to
originate a loan.
● The fees charged by the bank against the borrower for the creation of the
loan are known as “origination fees”.
Impairment of loan
● PFRS 9 provides that an entity shall recognize a loss allowance of expected
credit losses on financial asset measured at amortized cost.
● An entity shall measure the loss allowance for a financial instrument at an
amount equal to the lifetime expected credit losses if the credit risk on that
financial instrument has increased significantly since initial recognition.
Measurement of impairment
● The amount of impairment loss can be measured as the difference between
the carrying amount and the present value of estimated future cash flows
discounted at the original effective rate.
4. Which of the following is true when accounts receivables are factored
without recourse?
a. The transaction may be accounted for either as secured borrowing or sale
b. The receivables are used as collateral for a promissory note issued to the
factor by the owner of the receivables
c. The factor assumes the risk of collectability and absorbs any credit losses in
collecting the receivables
d. The financing cost should be recognized ratably over the collection period
of the receivables
5. If financial assets are exchanged for cash and other consideration but the
transfer does not meet the criteria for a sale, the transferor and the transferee
should account for transaction as
I. Secured borrowing
II. Pledge of collateral
a. I only c. Both I and II
b. II only d. Neither I nor II
6. If receivables are hypothecated (pledged) against borrowings, the amount of
receivables involved should be
a. Disclosed in the notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized
between the face value and the amount of borrowings
7. Notes receivable discounted with recourse should be
a. Included in total receivables with disclosure of contingent liability
b. Included in total receivables without disclosure of contingent liability
c. Excluded from total receivables with disclosure of contingent liability
d. Excluded from total receivables without disclosure of contingent liability
8. After being held for 60 days, a 120-day 8% interest-bearing note receivable
was discounted at a bank at 12%. The amount received from the bank is equal
to
a. Face value less discount rate at 8%
b. Face value less discount rate at 12%
c. Maturity value less discount at 8%
d. Maturity value less discount at 12%
9. If a note receivable is discounted without recourse
a. The contingent liability may be disclosed in either a contra account to note
receivable or in a note to the financial statements
b. Liability for note receivable discounted should be credited
c. Note receivable should be credited
d. The transaction should be accounted for as a borrowing as opposed to a sale
PROBLEMS
1. On January 1, Deliela Company assigned P500,000 of accounts receivable
to X Finance Inc. The company gave a 14% note for P450,000 representing
90% of the assigned accounts and received
proceeds of P432,000 after deduction of a 4% fee. On February 1, it remitted
P80,000 to X, including interest for 1 month on the unpaid balance. As a result
of this P80,000 remittance, accounts receivable assigned and notes payable
will be decreased by what amount?
Accounts receivable Notes payable
a. P80,000 P74,750
b. P80,000 P80,000
c. P72,000 P74,750
d. P74,750 P80,000
2. Shiella Corporation factored P6,000,000 of accounts receivable to X
Enterprises on October 1, 2021. Control was surrendered by the corporation.
X accepted the receivables subject to recourse for nonpayment. X assessed a
fee of 3% and retains a holdback equal to 5% of the accounts receivable. In
addition, X charged 15% interest computed on a weighted-average time to
maturity of the receivables of 54 days. The fair value of the recourse
obligation is P90,000.
Question 1: The corporation will receive and record cash of:
a. P5,296,850 c. P5,476,850
b. P5,386,850 d. P5,556,850
Question 2: Assuming all receivables are collected, the corporation’s cost of
factoring the receivables would be:
a. P313,150 c. P433,150
b. P180,000 d. P613,150
3. Dan Corporation received a P300,000, 6-month, 12% interest bearing note
from a customer. The note was discounted the same day by Sea Bank at 15%.
As a result of the discounting, it should recognize:
a. P0 interest expense c. P5,850 interest expense
b. P18,000 interest revenue d. P5,850 interest revenue
4. Jvion Company received from a customer a 1-year, P500,000 note bearing
annual interest of 8%. After holding the note for 6 months, it discounted the
note at a nearby bank at an effective interest rate of 10%. What amount of
cash did it received from the bank?
a. P540,000 c. P513,000
b. P523,810 d. P495,238
5. Mamelia Company accepted from a customer a P4,000,000, 90-day, 12%
interest bearing note dated August 31, 2021. On September 30, 2021, it
discounted the note with recourse at Sea Bank at 15%. However, the proceeds
were not received until October 1, 2021. The discounting with recourse is
accounted for as a conditional sale with recognition of a contingent liability.
What is the loss on note receivable discounting?
a. P40,000 c. P17,000
b. P23,000 d. P20,000
ILLUSTRATIVE EXAMPLES
Notes Receivable
1. Pinnacle Company sold to another entity a tract of land costing
P5,000,000 for P7,000,000 on January 1, 2025. The buyer paid
P1,000,000 down and signed a two-year promissory note for the
remainder of the purchase price plus 12% interest payable annually
every December 31. The note matures on January 1, 2027.
Requirement: Prepare journal entries for 2025, 2026 and 2027.
2. Pinnacle Company manufactures and sells electrical generators. On January
1, 2025, the entity sold an electrical generator costing P700,000 for
P1,000,000.
The buyer paid P100,000 down and signed a P900,000 non-interest bearing
note payable in three equal installments every December 31.
The prevailing interest rate for a note of this type is 12%. The present value of
an ordinary annuity of 1 for three periods is 2.4018.
Requirement: Prepare journal entries for the current year.
3. On December 31, 2025, ABC Company sold an equipment with a carrying
amount of P2,000,000 and received a non-interest bearing note requiring
payment of P500,000 annually for ten years. The first
payment is due December 31, 2026.
The prevailing rate of interest for this type of note at date of issuance is 12%
Present value of 1 at 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.650
1. On December 31, 2025, what is the carrying amount of the note receivable?
a. P5,000,000
b. P2,175,000
c. P1,610,000
d. P2,825,000
2. What is the gain on sale of equipment to be recognized in 2025?
a. P3,000,000
b. P2,175,000
c. P825,000
d. P0
3. What amount of interest income should be recognized for 2026?
a. P600,000
b. P339,000
c. P319,800
d. P300,000
4. What is the carrying amount of the note receivable on December 31, 2026?
a. P2,325,000
b. P4,500,000
c. P2,825,000
d. P2,664,000
Loans Receivable
4. XYZ Bank granted a loan to a borrower on January 1, 2025. The interest
rate on the loan is 10% payable annually starting December 31, 2025. The
loan matures in five years on December 31, 2029.
Principal amount P4,000,000
Direct origination cost 61,500
Origination fee received from borrower 350,000
The effective rate on the loan after considering the direct origination cost and
origination fee received is 12%
Requirements:
1. Compute the carrying amount of the loan receivable on January 1, 2025.
2. Prepare a table of amortization for the loan receivable.
3. Prepare the journal entries for 2025 and 2026.
Loan Impairment
5. On January 1, 2025, ABC Bank loaned P3,000,000 to a borrower. The
contract specified that the loan had a 6-year term and a 9% interest rate.
Interest is payable annually every December 31 and the principal amount will
be collected on December 31, 2030. Interest is collected for 2025.
On December 31, 2025, the bank determined that the loan has a 12-month
probability of default of 2% and expected to collect only 90% of the loan.
On December 31, 2026, the bank determined that there is a significant
increase in the credit risk of the loan but no objective evidence of impairment.
Based on relevant information, the bank concluded that there is a 30%
probability of default over the remaining term of the loan and it is expected
that only 60% of the loan will be collected. Interest is collected for 2026.
On December 31, 2027, the borrower was under financial difficulty and the
loan was considered impaired. The bank agreed that only 40% of the principal
will be collected on the due date. Interest is collected for 2027.
The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods and
0.77 for three periods.
Requirements:
1. Prepare the journal entries for 2025, 2026 and 2027.
2. Compute the carrying amount of the loan receivable on December 31, 2025,
2026 and 2027.