Notes Receivable

Notes Receivable: Claims supported by formal promises to pay

I. Classification
a. Interest Bearing Note: Promissory notes with stated interest rates
Example: X Company received a 2 year promissory note for 5,000,000 which bears an interest of 12%.
(Interest bearing since the note specifically states the rate of interest)
b. Non-Interest Bearing Note: Promissory notes without stated interest rates. The interest element is included as
part of the face amount of the note
Example: X Company received a 2 year promissory note for 5,000,000. (Non-interest bearing since the note
do not state an interest rate)
II. Initial measurement: recognized at fair value plus transaction costs directly attributable to the acquisition
a. Short term notes receivables: fair value is deemed equal to the face value, whether they are interest bearing
or non-interest bearing. The notes are not discounted since the effect of discounting is immaterial
b. Long term note receivables:
1. Interest bearing: fair value is equal to the face value of the note
Example: X Company received a 2 year promissory note for 5,000,000 which bears an interest of 12%.
(Fair value of the note is 5,000,000=face value)

2. Non-interest bearing: fair value is the present value of all future cash flows discounted using as imputed
(effective) interest rate. The difference between the Face Value and the Present Value (Fair Value) of the
note would be the unearned interest income (interest element). A non-interest bearing note may be:
 Payable on installment: use present value of an ordinary annuity of 1 (example: A note for
5,000,000 due on 5 equal annual installment of 1,000,000)
 Payable lump sum: use present value of 1 (example: A note for 5,000,000 due after 5 years)
1 − (1 + 𝑖)−𝑛
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 1 = (1 + 𝑖)−𝑛 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑜𝑓 1 =
𝑖

Present value of 1: amount you would pay now for an amount to be received in the future given an interest rate.
Present value of ordinary annuity of 1: amount you would pay now to be able to make several equal withdrawals
in the future

If walang sci. calculator, you may compute PV factors using your basic calculator as follows:
Example. Determine PV of 1 at 10% for 5 years and PV of OA of 1 at 10% for 5 periods
a. For PV of 1: 1 + rate, then press twice, then press the = sign five times (depende sa term). You shall
arrive at 0.6209. (Since 5 years yung example ko, then 5 times kailangang iclick si =. If the period is for 10
years, press the = sign 10 times, if 4 years then press it 4 times).
b. For PV of OA of 1: 1 + rate, then press twice, then press the = sign five times (depende sa term). Tapos
minus 1, then divide by the rate (10%). You shall arrive at -3.7908. Just drop the negative sign. Therefore,
PV of OA of 1 would be 3.7908.
III. Subsequent Measurement
a. Short term notes receivables: net realizable value
b. Long term note receivables:
1. Interest bearing: net realizable value
2. Non-interest bearing: amortized cost using the effective interest method

Type of Note Initial Measurement Subsequent Measurement

Short Term Notes
a. Interest bearing
b. Non-interest bearing
Long term Notes
a. Interest bearing
b. Non-interest bearing
Other Formulas:
Sales Revenue: PV of Note + Downpayment
Face Value Net Realizable Value
Face Value Net realizable Value
Face Value Net Realizable Value
Fair Value/Present Value Amortized Cost
 If lump sum note: use PV of 1
 If installment: use PV of OA
Gain(Loss) on Sale: (PV of Note + Downpayment) – BV of Asset Sold

Example:
1. ABC Company received a six month, 12% note from C Incorporated amounting to 500,000 on January 1, 2019.
What is the initial (January 1, 2019) measurement of the note?
Answer: 500,000 (short term interest bearing notes shall be measured at face value)

2. ABC Company received a six month, noninterest bearing note from C Incorporated amounting to 500,000 on
January 1, 2019. What is the initial (January 1, 2019) measurement of the note?
Answer: 500,000 (short term noninterest bearing notes shall be measured at face value)

3. ABC Company received a 12% note from C Incorporated on January 1, 2019 amounting to 5,000,000 which is
payable on January 1, 2024 (after five years). What is the initial (January 1, 2019) measurement of the note?
Answer: 5,000,000 (long term interest bearing notes shall be measured at face value)

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4. ABC Company received a promissory note from C Incorporated on January 1, 2019 amounting to 5,000,000 which
is payable on January 1, 2024 (after 5 years). The prevailing rate for these type of notes is 10%. What is the initial
(January 1, 2019) measurement of the note?
Answer: 3,104,500 (long term, non-interest bearing notes, payable lump sum shall be measured at fair
value/present value)
Solution:
a. Compute for the present value factor needed. Since the note is payable lump sum, use the present value of 1
in determining the fair value of the note. PV of 1 at 10% for 5 years is 0.6209.
b. Multiply PV of 1 (0.6209) by the face amount of the note (5,000,000). Therefore, the initial carrying amount
of the note is (5,000,000 x 0.62090) 3,104,500
c. The difference between 5,000,000 and 3,104,500 would be recognized as the unearned interest income to be
amortized throughout the term of the note

5. ABC Company received a promissory note from C Incorporated on January 1, 2019 amounting to 5,000,000. The
note is payable in five equal annual installment of 1,000,000 starting January 1, 2020. The prevailing rate for these
type of notes is 10%. What is the initial (January 1, 2019) measurement of the note?
Answer: 3,790,800 (long term, non-interest bearing notes, payable on installment shall be measured at fair
value/present value)
Solution:
a. Compute for the present value needed. Since the note is payable on installment, use Present Value of Ordinary
Annuity of 1 in determining the fair value of the note. PV of OA of 1 at 10% for 5 periods is 3.7908
b. Multiply the PV of OA (3.7908) by the annual installment (1,000,000). Therefore, the initial carrying amount
would be (3.7908 x 1,000,000) 3,790,800.
c. The difference between the face value of the note (5,000,000) and its fair value/present value (3,790,800) would
be recognized as the unearned interest income to be amortized throughout the life of the note

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