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Intermediate
Accounting 1
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Notes Receivable
Prof. Ernie D. Tano, CPA, MBA
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Notes Receivable are claims

supported by formal promises to pay
usually in the form of notes
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A promissory note is a written contract

in which one person, known as the
maker, promises to pay another person,
known as the payee, a definite sum of
money
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Dishonored Notes
- When a promissory note matures and is not paid, it is said
to be dishonored.
- Theoretically, dishonored notes receivable should be
removed from the notes receivable account and transferred
to accounts receivable

- The amount debited to accounts receivable should include

the face amount, interest and other charges
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Initial measurement of NR

- Shall be measured initially at present value.

Interest-bearing long-term notes receivable – at face value

which is actually the present value upon issuance

NonInterest-bearing long-term notes receivable – at present value

which is the discount value of the future cash flows using the
effective interest rate
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Subsequent measurement of LR
PFRS 9, par. 5.2.1

- Long-term notes receivable shall be measured at

amortized cost using the effective interest method
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Meaning of amortized cost

- The amortized cost is the amount at which the loan receivable
is measure initially:

a. Minus principal repayment

b. Plus or Minus cumulative amortization of any
difference between the initial carrying amount
and the principal maturity amount

c. Minus reduction for impairment or uncollectibility

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Interest & Noninterest Bearing

Interest bearing note

“On Dec. 31, 2018, the entity received a 1-year note for
P100,000 plus interest of 12%”

Noninterest bearing note

“On Dec. 31, 2018, the buyer issued a 1-year noninterest

bearing note for P100,000. The prevailing interest rate for
this note is 12%
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Interest & Noninterest Bearing

Interest bearing note

“On Dec. 31, 2018, the entity received a 1-year note for
P100,000 plus interest of 12%”
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P 100,000
Interest ( 12%)
Total (112%)
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Interest & Noninterest Bearing

Interest bearing note

“On Dec. 31, 2018, the entity received a 1-year note for
P100,000 plus interest of 12%”
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P 100,000 P 100,000
Interest ( 12%) P 12,000 P12,000
Total (112%)

P100,000 x 12% = P12,000

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Interest & Noninterest Bearing

Interest bearing note

“On Dec. 31, 2018, the entity received a 1-year note for
P100,000 plus interest of 12%”
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P 100,000 P 100,000
Interest ( 12%) P 12,000 P12,000
Total (112%) P100,000 P12,000 P112,000
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Interest & Noninterest Bearing

Noninterest bearing note
“On Dec. 31, 2018, the buyer issued a 1-year noninterest
bearing note for P100,000. The prevailing interest rate for
this note is 12%
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%)
Interest ( 12%)
Total (112%) P 100,000
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Interest & Noninterest Bearing

Noninterest bearing note
“On Dec. 31, 2018, the buyer issued a 1-year noninterest
bearing note for P100,000. The prevailing interest rate for
this note is 12%
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P89,286
Interest ( 12%)
Total (112%) P 100,000

P100,000 ÷ 112% = P89,286

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Interest & Noninterest Bearing

Noninterest bearing note
“On Dec. 31, 2018, the buyer issued a 1-year noninterest
bearing note for P100,000. The prevailing interest rate for
this note is 12%
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P89,286
Interest ( 12%) 10,714
Total (112%) P 100,000

P100,000 – 89,2861 = P10,714 or P100,000 x (12% ÷ 112%)

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Interest & Noninterest Bearing

Noninterest bearing note
“On Dec. 31, 2018, the buyer issued a 1-year noninterest
bearing note for P100,000. The prevailing interest rate for
this note is 12%
12/31/2018 Jan 1 – Dec. 31 12/31/2019
Principal (100%) P89,286 P89,286
Interest ( 12%) 10,714 10,714
Total (112%) P89,286 10,714 P 100,000
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Interest & Noninterest Bearing

Interest bearing note Noninterest bearing note
12/31/2018 Jan 1 – Dec. 12/31/2019 12/31/2018 Jan 1 – 12/31/2019
31 Dec. 31
Principal P 100,000 Principal
Interest Interest
Total Total P 100,000

12/31/2018 Jan 1 – Dec. 12/31/2019 12/31/2018 Jan 1 – 12/31/2019

31 Dec. 31
Principal P 100,000 P 100,000 Principal P89,286 P89,286
Interest P 12,000 P12,000 Interest 10,714 10,714
Total P100,000 P12,000 P112,000 Total P89,286 10,714 P 100,000
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Interest & Noninterest Bearing

Interest bearing note Noninterest bearing note
12/31/2018 Jan 1 – Dec. 12/31/2019 12/31/2018 Jan 1 – 12/31/2019
31 Dec. 31
Principal P 100,000 Principal
Interest Interest
Total Total P 100,000

Notes Receivable P100,000 12/31/2018 Jan 1 – 12/31/2019

Dec. 31
Sales P100,000
Principal P89,286 P89,286
Interest 10,714 10,714
Determine the Total P89,286 10,714 P 100,000
Present Value
Notes Receivable P100,000
Unearned Interest Income P 10,714
Sales P 89,286
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Illustration: Interest Bearing

An entity owned a tract of land costing P800,000and sold

the land for P1,000,000. The entity received a 3-year note
for P1,000,000 plus interest of 12% compounded annually

When interest is “compounded”, The selling price of P1,000,000

it means the accrued interest is assumed to be the present
receivable also earns interest value of note since it is interest
bearing
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Illustration 1: Noninterest Bearing

Equal installment: Present Value = Cash Sales Price
An entity manufactures and sells machinery. On January 1, 2020, the
entity sold machinery costing P280,000 for P400,000.

The buyer signed a noninterest bearing note for P400,000 payable in

four equal installments every December 31. The cash sale price of the
machinery is P350,000.
Face Value P400,000 Cash sales price P350,000
Present Value (Cash Cost of machine
Sale Price) - 350,000 - 280,000
Unearned interest Gross Income
income 50,000 70,000
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Illustration 1: Noninterest Bearing

Equal installment: Present Value = Cash Sales Price
Face Value P400,000 To record the sales:
Present Value (Cash
Sale Price) - 350,000 Notes receivable 400,000
Unearned interest Sales 350,000
income 50,000 Unearned Interest Income 50,000

To record the first installment collection

Cash 100,000
Notes receivable 100,000
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Illustration 1: Noninterest Bearing

Equal installment: Present Value = Cash Sales Price
To recognize the unearned interest income over the term of the note:

Unearned interest income 20,000

Interest income 20,000

(a) Note Receivable (b) Fraction Interest Income

2020 400,000 4 / 10 20,000 50K x 4/10
400,000 – 100,000
2021 300,000 3 / 10 15,000 50K x 3/10
300,000 – 100,000
2022 200,000 2 / 10 10,000 50K x 2/10

200,000 – 100,000 2023 100,000 1 / 10 5,000 50K x 1/10

1,000,000 50,000

400,000 ÷ 1,000,000
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Illustration 1: Noninterest Bearing

Equal installment: Present Value = Cash Sales Price
Presentation: (December 31, 2020)
Current Asset
Note receivable – current portion 100,000 Note Unearned
Receivable Interest
Unearned interest income (15,000)
2020 100,000 20,000
Carrying Amount or amortized cost 85,000
2021 100,000 15,000
2022 100,000 10,000
Noncurrent Asset 2023 100,000 5,000
Note receivable – noncurrent portion 200,000 50,000
Unearned interest income (15,000)
Carrying Amount or amortized cost 185,000
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Illustration 2: Noninterest Bearing

Equal installment: Present Value = Unknown
On January 1, 2020, an entity sold an equipment with a cost of P250,000
for P400,000.

The buyer paid a down of P100,000 and signed a noninterest bearing

note for P300,000 payable in equal annual installment of P100,000
every December 31.

The prevailing interest rate for a note of this type is 10%.

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Illustration 2: Noninterest Bearing

Equal installment: Present Value = Unknown
The present value of an ordinary annuity of 1 for three periods at 10%
is 2.4869

The present value of note is computed by multiplying the annual

installment of P100,000 by the present value factor of 2.4869 or
P248,690
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Illustration 2: Noninterest Bearing

Equal installment: Present Value = Unknown
Let us understand future and present value:
Present value and Future value of 1.0 @ 10% for 3 years
1.0 x 1.1 1.1 x 1.1 1.210 x 1.1

End of Year Future

Now
Year 1 Year 2 Year 3 Value of
1.0 in 3
1.00 1.1 1.210 1.3310 years @
10%
Present End of Year interest
Now
Value of Year 1 Year 2 Year 3
1.0 in 3
years @ 0.7513 0.8265 0.9091 1.00
10% 0.8263 ÷1.1 0.9091 ÷1.1 1.0 ÷1.1
interest
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Illustration 2: Noninterest Bearing

The present value of an ordinary annuity of 1 for three periods at 10%
is 2.4869
End of Year
Installment Now
Year 1 Year 2 Year 3

1.00 ÷1.1 1st installment 0.9091 1.00

12/31/2020
(1.00 ÷1.1 2nd installment 0.8265 0.9090 1.00
÷1.1) 12/31/2021
3rd installment 0.7513 0.8263 0.9090 1.00
12/31/2022
(1.00 ÷1.1
Present Value Factor 2.4869
÷1.1 ÷ 1.1)

1- (1.00 ÷ 1.1÷1.1÷1.1)
.10
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Illustration 2: Noninterest Bearing

The present value of note is computed by multiplying the annual
installment of P100,000 by the present value factor of 2.4869 or
P248,690

PVF Annual Present Value

Installment
1st installment
12/31/2020 0.9091 100,000 90,910
2nd installment
12/31/2021 0.8265 100,000 82,650
3rd installment
12/31/2022 0.7513 100,000 75,130
Total 2.4869 P100,000 x
248,690 2.4869
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Illustration 2: Noninterest Bearing

To record the sales of equipment:

Cash 100,000 Face value of note 300,000

Notes receivable 300,000 PV of note 248,690
Equipment 250,000 Unearned Interest Inc. 51,310
Gain on sale of equipment 98,690
PV of note 248,690
Unearned Interest Income 51,310
Down payment 100.000
Sale Price 348,690
To record the first installment collection
Cost of equipment 250,000
Cash 100,000 Gain on sales of equip 98,690
Notes receivable 100,000
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Illustration 2: Noninterest Bearing

To record the interest income for 2020:
Unearned interest income 24,869
Interest income 24,869

P248,690 x 10% P100,000 – 24,869 P248,690 – 75,131

Date Annual Interest Income Principal Present Value

Collection
1/01/2020 248,690
12/31/2020 100,000 24,869 75,131 173,559
12/31/2021 100,000 17,356 82,644 90,915
12/31/2022 9,085 90,915
100,000 -
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Illustration 3: Noninterest Bearing

Lump sum basis: Present Value = Unknown
On January 1, 2020, an entity sold an equipment with a cost of P600,000
with accumulated depreciation of P250,000.

The entity received as consideration P100,000 cash and a P400,000

noninterest bearing note due on January 1, 2023.
The prevailing interest rate for a note of this type is 10%. The present
value of 1 at 10% for 3 years is 0.7513
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Illustration 3: Noninterest Bearing

Lump sum basis: Present Value = Unknown

The prevailing interest rate for a note of this type is 10%. The present value of 1 at
10% for 3 years is 0.7513

Observe that the note is collectible on a lump sum basis after 3 years

Face of note 400,000

Present value (400,000 x .7513) 300,520
Unearned interest income 99,480

The unearned interest income is sometime described as “discount on note receivable”

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Illustration 3: Noninterest Bearing

Lump sum basis: Present Value = Unknown
Face of note 400,000 01/01/2020:

Present value (400K x .7513) 300,520 Cash 100,000

Notes receivable 400,000
99,480
Unearned interest income Accumulated depreciation 250,000
Present value of note 300,520 Equipment 600,000
Cash received 100,000 Gain on sale of equipment 50,520
Sale price 400,520 Unearned Interest Income 99,480
Carrying amount of equipment 350,000
(600K – 250K)
Gain n sale of equipment 50,520
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Illustration 3: Noninterest Bearing

Date Interest Unearned Present 12/31/2021

Income interest Value
Unearned interest income 33,057
1/01/2020 99,480 300,520 Interest income 33,057
12/31/2020 30,052 69,428 330,572
12/31/2021 33,057 36,371 363,629 12/31/2022
12/31/2022 36,371 - 400,000
Unearned interest income 36,371
Interest income 36,371
12/31/2020
Unearned interest income 30,052
01/01/2023
Interest income 30,052
Cash 400,000
Note receivable 400,00
0
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End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, et.al