CHAPTER 2 – PART 2

ACCOUNTING FOR NOTES RECEIVABLE

What is a Notes Receivable? A
promissory note?
• NR are claims evidenced by a formal promise to
pay called “ negotiable promissory note”.
• Under Negotiable Instruments Law, a negotiable
promissory note is an unconditional promise in
writing made by one person to another, signed
by the maker engaging him to pay on demand or
at fixed determinable future time a sum certain
in money to order or to bearer.
What are the types of Promissory Note?

• Interest-bearing – one that provides for the

payment of interest.
• Non-interest bearing – one which makes no
provision for interest but it does not mean that
there is no interest accruing on the receivable.
The face value already includes an imputed
interest for the term of the note.
Accounting for Non-interest Bearing Note
(NIBN)
• When issued solely for cash and no other rights or privileges are
exchanged, the present value or amortized cost of the note on the date it is
received is = to the cash proceeds exchanged
• When exchanged for property, goods or services, the PRESENT VALUE of
the note on the date it is received is the FMV of the property, goods or
services, or the FMV of the note whichever is more clearly determinable.
Otherwise an imputed rate is used to determine its PV.
• Face – PV = (premium)/discount
• Premium/(Discount) is to be amortized to interest revenue over the term of
the note using the effective interest method
• AC/CV = Face + Unamortized Premium (or less Unamortized discount)
• Interest Revenue = CA x ER
Different features of Long-term NR

• Long-term Interest-Bearing Note with Realistic

Interest Rate
• Long-term Non-Interest-Bearing Note
• Long-term Non-Interest-Bearing Installment
Notes Receivable
• Long-term Installment Note Receivable (SR < MR)
• Long-term Installment Note Receivable (SR >MR)
Solve the following problems.

• Problem 2-4 Format Company

• Problem 2-5 Formatted Company
• Problem 2-6 CRV Company
• Problem 2-7 Pinky Pop Company
• Problem 2-8 Pinky Pip Company