Financial

Accounting
1
Notes
Receivable
 Definition of Notes Receivable
Notes receivable are claims supported by
formal promises to pay usually in the form of
notes.

Note Receivable is also known as Promissory

Note, where the maker promises to pay the
amount indicated at a specified date.
Notes receivable generally are classified as
current receivable, however it can be
classified as non-current receivable upon
the presence of any relevant information.

Trivia: Promissory note was derived from I Promise to pay you, and Im Sorry
 Measurement of Notes
Receivable
Non-Interest Bearing Long term Notes Receivables are
measured initially at its Present Value.
Non-Interest Bearing Short term Notes Receivables are
measured initially at its Face Value.
Interest Bearing Short term or Long term Notes
Receivable are initially measured at their Face Value.

The difference of Face Value and Present Value of a

Non-Interest bearing note is recognized as Unrealized
Interest Income to be amortized using the effective
interest method.
 Interest Bearing Note
Receivable
Non-Interest bearing note as said earlier are measure at Face
Value.
Example:
A is a retail seller of Apple gadgets. On July 10, 2014 Yum
company orders 1000 units of iPhone 5s, A received a 2-year
note for P 300,000 plus interest of 12% compounded annually.
10-Jul-14Note Recievable P 300,000
Sales P 300,000 Face Value 300,000
Interest for '14 18,000
31-Dec-14 Accrued Interest Income 18,000
Carrying
Interest Income 18,000 Amount 318,000
31-Dec-14 Accrued Interest Income 38,160 Rate 12%
Interest Income 38,160 Interest for '15 38160

Compounded in mathematical parlance means that any

accrued interest receivable also earns interest. This concept
was discussed extensively on your Mathematics of Investment.
 Non-Interest Bearing Note
Receivable
If the note is non-interest bearing, the
problem is on how to record the N/R. First
get the present value of the note (PV Factor
* Face of the note). PV Factor=
Example:
Toyota company sold a vehicle costing P800,000 for P1,300,000.
On July 1, 2014 the buyer signs a non-interest bearing note for P1,100,000
and paid P200,000 down payment. The note is payable in four equal
installments every December 31. The prevailing interest rate for similar
note is 10%.
Requirements: Using the independent cases given.
1. How much is the unearned interest income as of December 31 2014?
2. How much interest should be recorded on December 31, 2014 and
2015?
3. How much is the Gain/Loss on sale of the Vehicle?
 Case #1
*The vehicle has a Cash Selling price of 1,000,000.
Requirement Number 1:
Face Value of the note 1,100,000
Present Value/Cash sale Price 1,000,000
Unearned Interest Income 100,000
Interest earned as of Dec 31, 2014 20,000
Unearned Interest Income as of Dec, 31, 2014 80,000
Date Note Receivable Fraction Interest Income
Year 1 1,100,000 1100/2750 40,000
Year 2 825,000 825/2750 30,000
Year 3 550,000 550/2750 20,000
Year 4 275,000 275/2750 10,000
Total 2,750,000 100,000

Requirement Number 2:
2014 (40,000*6/12)= 20,000
2015 [(40,000*6/12)+(30,000*6/12)]= 35,000

Requirement Number 3:
No Gain/Loss on Sale of Vehicles is recognized because TOYOTAs ordinary course
of business is to sell cars!
The note was issued July 1, 2014. Therefore, Interests should accrue for 6 months only
for the 2014 and for 2015 the remaining 6 months interest from previous year should
be recognized first plus the interest earned during 2015 which is the year 2 Interest
time 6/12. Gets? That is how it works
If Cash Sales Price is given, it is considered also as the Present Value, extensively
discussed in PPE.
 Case #2
*Assuming Toyota sold a Delivery truck not classified as inventory with a Carrying amount of
1,200,000.
Requirement #1:
Face Value of the note 1,100,000
Present Value/Cash sale Price 871,713
Unearned Interest Income 228,287
Interest earned as of Dec 31, 2014 43,585.65
Unearned Interest Income as of Dec, 31, 2014 184,701.35

Date Annual Collection Interest Income Principal Present Value

1-Jul-14 871713.00
1st Payment 275000.00 87171.30 187828.70 683884.30
2nd Payment 275000.00 68388.43 206611.57 477272.73
3rd Payment 275000.00 47727.27 227272.73 250000.00
4th Payment 275000.00 25000.00 250000.00 0.00

Requirement #2:
2014 (87171.3*6/12)= 43,585.65
2015 [(87171.3*6/12)+(68388.43*6/12)]= 77,779.87
Requirement #3:
Selling Price (871,713+200,000) 1,071,713
Carrying (1,200,000)
Loss on sale of equipment 128,287
 Case #3
Instead of 4 equal installment, the note is received upon maturity.
Requirement #1:
Face Value of the note 1,100,000
Present Value/Cash sale Price 751,314.80
Unearned Interest Income 384,685.20
Interest earned as of Dec 31, 2014 37,565.74
Unearned Interest Income as of Dec, 31, 2014 347,119.46

Date Interest Income Unearned Interest Present Value

1-Jul-14 348685.20 751314.80
1st year 75131.48 273553.72 826446.28
2nd year 82644.63 190909.09 909090.91
3rd year 90909.09 100000.00 1000000.00
4th year 100000.00 0.00 1100000.00

Requirement #2:
2014 (75,131.48*6/12)= 37,565.74
2015 [(75,131.48*6/12)+(82644.63*6/12)]= 78,888.06
Requirement #3:
No gain or loss again! Because it is the inventory of TOYOTA!
 NOTES:
Sale of inventory thru a Note doesnt recognize
Gain on Sale, because it is a sale relating to the
ordinary course of business.
Sale of other asset not classified as Inventory thru a
Note should recognize a Gain on Sale of asset. The
difference of the Sales price (PV of N/R + any cash
received) and the Carrying amount of the asset
(Cost Accumulated depreciation if any).
When a Cash Selling Price is given, this is also
represents the Present Value of the notes.
Try to practice more problems in your own books

GOD BLESS
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