Accounting 103

MODULE 1

NOTES AND LOANS

RECEIVABLES
Notes Receivable
Discounting of Notes Receivable
Loans Receivable
 RECEIVABLES
Review and Overview of Receivables

Module 1_Notes and Loans Receivable 2

RECEIVABLES
Receivables are financial assets that represent a contractual
right to receive cash or another financial asset from another
entity

Claims arising from sale of Claims arising from sources

merchandise or services in other than the sale of
the ordinary course of merchandise or services
business
Trade Receivables Non-Trade
Receivables

Module 1_Notes and Loans Receivable 3

RECEIVABLES
Trade Receivables

Accounts Receivable Notes Receivable

Those supported by formal

Open accounts or those not promises to pay in the form of
supported by promissory notes notes

Classification : Current or Non-Current Assets

• Dishonored notes shall be removed from notes receivable account and

transferred to accounts receivable at an amount to include, if any, interest
and other charges.
Module 1_Notes and Loans Receivable 4
NOTES RECEIVABLE
Notes Receivable are claims supported
by formal promises to pay usually in the
form of notes
• A negotiable promissory note is an unconditional
promise in writing made by one person to another,
signed by the maker, engaging to pay on demand or
at a fixed determinable future time a sum certain in
money to order or to bearer
• Standing alone, the term notes receivable
represents only claims arising from sale of
merchandise or service in the ordinary course of
business.

Module 1_Notes and Loans Receivable 5

 VALUATION OF NOTES RECEIVABLE :
INITIAL RECOGNITION
Conceptually, notes receivable shall be measured initially at Present Value.
Present value is the sum of all future cash flows discounted using the prevailing market rate
of interest (effective interest rate)

Short Term Notes Long term Notes

Receivable Receivable
• Short term notes receivable shall be ➢Interest Bearing Long term notes are
measured at face value measures at face value which is
actually the present value upon
issuance
➢Noninterest Bearing long-term notes
are measured at present value which is
the discounted value of the future cash
Module 1_Notes and Loans Receivable 6
flows using the effective interest rate.
 Valuation of Notes Receivable : Initial
Recognition
Interest Bearing NR Journal Entry
An entity owned a tract of land costing P800,000 Notes Receivable 1,000,000
and sold the land for P1,000,000. Land 800,000
The entity received a 3-year note for P1,000,000 Gain on Sale of Land 200,000
plus interest of 12% compounded annually.
Accrued Interest Receivable 120,000
Notes Receivable is measured initially at
Interest Income 120,000
P1,000,000.
(12% x P1,000,000)

P1,000,000 is the Face Value which is actually

the present value upon issuance

Module 1_Notes and Loans Receivable 7

 Valuation of Notes Receivable : Initial
Recognition
Non-Interest Bearing NR :
Illustration 1
An entity manufactures and sells machinery. On Journal Entry 2019
January 1, 2019, the entity sold machinery costing
P280,000 for P400,000. Notes Receivable 400,000
Sales 350,000
The buyer signed a noninterest bearing note for
P400,000, payable in four equal installments every Unearned Interest Income 50,000
December 31.
The cash sales price of the machinery is P350,000. FS Presentation
Face Value of Note 400,000 Notes Receivable 400,000
Present value – cash sales price 350,000 Less : Unearned Interest Income (50,000)
Unearned interest income 50,000 Notes Receivable, Carrying Amount (PV) 350,000

*The present value of NR is equal to the cash

Cash Sale Price 350,000 sales price of P350,000 at initial recognition.
(Note : co-relate to your PPE topic, acquisition
Cost of Machinery 280,000 through deferred credit)
Module
Gross 1_Notes and Loans Receivable
Income 70,000 8
 Valuation of Notes Receivable : Initial
Non-Interest Bearing NR : Recognition
Illustration 2 Computations :
On January 1, 2019, an entity sold an equipment with a Face Value of Note 300,000
cost of P250,000 for P400,000.
Present Value of Note (100,000 x 2.4869) (248,690)
The buyer paid a down of P100,000 and signed a non-
interest bearing note for P300,000 payable in equal Unearned interest Income 51,310
annual installment of P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
The present value of an ordinary annuity of 1 for three Present Value of Note 248.690
periods at 10% is 2.4869. Cash Received – Down Payment 100,000
*The present value of the note is computed by multiplying the
annual installment of P100,000 by the present value factor of Sale Price 348,690
2.4869 or P248,690. Cost of Equipment 250,000
Journal Entry : Sale of Equipment
Gain on Sale of Equipment 98,690
Cash 100,000
Financial Statement Presentation : Initial Recognition
Notes Receivable 300,000
Face Value of Note 300,000
Equipment 250,000
Less : Unearned interest income (51,310)
Gain on sale of equipment 98,690
9
Module 1_Notes
Unearned and Loans
Interest Receivable
Income 51,310 Notes Receivable, Carrying Amount (PV) 248,690
 Valuation of Notes Receivable : Initial
Non-Interest Bearing NR : Recognition
Illustration 3
On January 1, 2019, an entity sold an equipment costing Computations :
P600,000 with accumulated depreciation of P250,000. Face Value of Note 400,000
The entity received as consideration P100,000 cash and
a P400,000 noninterest bearing note due on January 1, Present Value of Note (400,000 x .7513) (300,520)
2022. Unearned interest Income* 99.480
The prevailing rate of interest for a note of this type is
10%. The present value of 1 at 10% for 3 years is
0.7513. Present Value of Note 300,520
Note : Note is collectible on a lump sum basis after 3 Cash Received – Down Payment 100,000
years.
Sale Price 400,520
Journal Entry : Sale of Equipment *The
Unearned Carrying Amount of Equipment (600k-250k) (350,000)
Cash 100,000
Interest Gain on Sale of Equipment 50,520
Notes Receivable 400,000 Income is
Accumulated Depreciation 250,000 sometimes Financial Statement Presentation : Initial Recognition
Equipment 600,000
described as Face Value of Note 400,000
“Discount on
Gain on Sale of Equipment 50,520 Note Less : Unearned interest income (99,480)
10
Unearned
Module Interest
1_Notes Income
and Loans Receivable 99,480 Receivable” Notes Receivable, Carrying Amount (PV) 300,520
 VALUATION OF NOTES RECEIVABLE :
SUBSEQUENT RECOGNITION

Subsequent to initial recognition, long term notes receivable shall

be measured at “amortized cost”.
• “Amortized cost” = the amount at which the receivable is
measured initially – principal repayment+ or – the cumulative
amortization of any difference between the initial carrying
amount and the principal maturity amount - reduction for
impairment or uncollectibility.

Module 1_Notes and Loans Receivable 11

 Valuation of Notes Receivable : Subsequent
Recognition
Non-Interest Bearing NR :
Illustration 1
An entity manufactures and sells machinery. On To recognize the unearned interest income over the term of
January 1, 2019, the entity sold machinery costing the note:
P280,000 for P400,000.
Unearned interest income 20,000
The buyer signed a noninterest bearing note for
P400,000, payable in four equal installments every Interest Income 20,000
December 31.
The recognition of the unearned interest income is
The cash sales price of the machinery is P350,000. based on the outstanding NR method
Journal Entry 2019
FS Presentation :Subsequent Measurement (Current Portion)
Notes Receivable 400,000 Notes Receivable 100,000
Sales 350,000 Less : Unearned Interest Income (15,000)
Unearned Interest Income 50,000 Carrying Amount or Amortized cost 85,000
To record the first installment collection
FS Presentation:Subsequent Measurement (Non-Current Portion)
Cash 100,000 Notes Receivable – non current portion 200,000
Notes Receivable 100,000 Less : Unearned Interest Income (15,000)
12
Module 1_Notes and Loans Receivable Carrying Amount or Amortized cost 185,000
 Valuation of Notes Receivable: Subsequent
Non-Interest Bearing NR : Recognition
Illustration 2 Computations :
On January 1, 2019, an entity sold an equipment with a Face Value of Note 300,000
cost of P250,000 for P400,000.
Present Value of Note (100,000 x 2.4869) (248,690)
The buyer paid a down of P100,000 and signed a non-
interest bearing note for P300,000 payable in equal Unearned interest Income 51,310
annual installment of P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
The present value of an ordinary annuity of 1 for three Present Value of Note 248.690
periods at 10% is 2.4869. Cash Received – Down Payment 100,000
*The present value of the note is computed by multiplying the
annual installment of P100,000 by the present value factor of Sale Price 348,690
2.4869 or P248,690. Cost of Equipment 250,000
Journal Entry : Sale of Equipment
Gain on Sale of Equipment 98,690
Cash 100,000
Financial Statement Presentation : Initial Recognition
Notes Receivable 300,000
Face Value of Note 300,000
Equipment 250,000
Less : Unearned interest income (51,310)
Gain on sale of equipment 98,690
13
Module 1_Notes
Unearned and Loans
Interest Receivable
Income 51,310 Notes Receivable, Carrying Amount (PV) 248,690
 Valuation of Notes Receivable : Subsequent
Non-Interest Bearing NR : Recognition
Illustration 2
Journal Entry : Sale of Equipment
*In this case, the computation of interest income is made
Cash 100,000 using the effective interest method
Notes Receivable 300,000
Annual Interest
Date Principal Present Value
Equipment 250,000 C ollection Incom e
Jan. 1, 2019 248,690
Gain on sale of equipment 98,690 Dec. 31, 2019 100,000 24,869 75,131 173,559
Unearned Interest Income 51,310 Dec. 31, 2020 100,000 17,356 82,644 90,915
Dec. 31, 2021 100,000 9,085 90,915 -
TOTALS 3 0 0 ,0 0 0 5 1 ,3 1 0 2 4 8 ,6 9 0
To record the first installment collection
Cash 100,000
Financial Statement Presentation : Subsequent Recognition
Notes Receivable 100,000 (end of 2019)

To record the interest income for 2019 Face Value of Note 300,000
Unearned interest income 24,869 Less : First Installment Collection (100,000)
Interest Income 24,869 Less : Unearned Interest Income (26,441)
Carrying
14 Amount of NR (PV) 173,559
Module 1_Notes and Loans Receivable
 Valuation of Notes Receivable : Subsequent
Non-Interest Bearing NR : Recognition
Illustration 3
On January 1, 2019, an entity sold an equipment costing Journal Entry : Recognition of Interest Income for 2019
P600,000 with accumulated depreciation of P250,000.
Dec. 31
The entity received as consideration P100,000 cash and
a P400,000 noninterest bearing note due on January 1, Unearned Interest Income 30,052
2022. Interest Income 30,052
The prevailing rate of interest for a note of this type is
10%. The present value of 1 at 10% for 3 years is Da te
Inte re st U ne a rne d Int. Pre se nt
0.7513. Inco m e Inco m e Va lue
Jan. 1, 2019 99,480 300,520
Note : Note is collectible on a lump sum basis after 3 Dec. 31, 2019 30,052 69,428 330,572
years. Dec. 31, 2020 33,057 36,371 363,629
Dec. 31, 2021 36,371 - 400,000
Journal Entry : Sale of Equipment in 2019 (Jan) TOTALS 9 9 ,4 8 0
Cash 100,000
Notes Receivable 400,000 Financial Statement Presentation : Subsequent
Recognition (End of 2019)
Accumulated Depreciation 250,000
Face Value of Note 400,000
Equipment 600,000
Less : Unearned interest income (69,428)
Gain on Sale of Equipment 50,520
15 Notes Receivable, Carrying Amount (PV) 330,572
Unearned
Module Interest
1_Notes Income
and Loans Receivable 99,480
SAMPLE EXERCISES
Problem 6-1 (Feasible Company)
Problem 6-2 (Bygone Company)
Problem 6-3 (Innovative Company)
Problem 6-11 (Persevere Company)
Try solving the problems prior to viewing the answers
ASSIGNMENT
Problem 6-4 (Gullible Company)
Problem 6-5 (Enigma Company)
Problem 6-12 (Precious Company)
 LOAN RECEIVABLE

18
Module 1_Notes and Loans Receivable
 LOAN RECEIVABLE
A loan receivable is a financial asset arising
from a loan granted by a bank or other
financial institution to a borrower of client.
• The term of the loan may be short-term but in most cases,
the repayment periods cover several years.

19
Module 1_Notes and Loans Receivable
 MEASUREMENT OF LOAN RECEIVABLE
INITIAL RECOGNITION SUBSEQUENT MEASUREMENT
• At initial recognition, an entity shall measure a
loan receivable at fair value plus transaction • A Loan Receivable is measured subsequently
costs that are directly attributable to the at Amortized Cost using the effective interest
acquisition of the financial asset. method.

• Fair value = Transaction price (amount of loan • Amortized cost is the amount at which the
granted) loan receivable is measured initially minus
principal repayment, plus or minus cumulative
• Direct origination costs should be included in amortization of any differences between the
the transaction cost that is part of the initial initial carrying amount and the principal
measurement of the Loan Receivable maturity amount minus reduction for
impairment or uncollectibility.
• Indirect origination costs should be treated as
outright expense
20
Module 1_Notes and Loans Receivable
 ORIGINATION FEES
• Includes compensation for the following activities:
✓ Evaluating the borrower’s financial condition
✓ Evaluating guarantees, collateral, and other security
✓ Negotiating the terms of the loan
The fees charged by the bank against the ✓ Preparing and processing the documents related to
borrower for the creation of the loan are the loan
known as origination fees. ✓ Closing and approving the loan transaction

21
Module 1_Notes and Loans Receivable
 ACCOUNTING FOR ORIGINATION FEES
• The origination fees received from borrower are recognized as unearned interest income and amortized over
the term of the loan.
• If the origination fees are not chargeable against the borrower, the fees are known as “direct origination costs”
• Preferably, the direct origination costs are offset directly against any unearned origination fees received.
• The origination fees received and the direct origination costs are included in the measurement of the loan
receivable.
Illustration :
Global Bank granted a loan to a borrower on January 1, Initial Carrying Amount of the Loan
2019. The interest on the loan is 12% payable annually
starting December 31, 2019. The loan matures in three Principal Amount 5,000,000
years on December 31, 2021. Origination fees received (331,800)
Principal amount 5,000,000 Direct Origination costs incurred 100,000
Origination fees received from borrower 331,800
Initial Carrying Amount of Loan 4,768,200
Direct origination costs incurred 100,000

22
Module 1_Notes and Loans Receivable
 ACCOUNTING FOR ORIGINATION FEES
Illustration :
Journal Entries on January 1, 2019:
Global Bank granted a loan to a borrower on January 1,
2019. The interest on the loan is 12% payable annually To record the loan
starting December 31, 2019. The loan matures in three Loan Receivable 5,000,000
years on December 31, 2021.
Cash 5,000,000
Principal amount 5,000,000
Origination fees received from borrower To record the origination fees received from the borrower:
331,800
Cash 331,800
Direct origination costs incurred 100,000
Unearned interest income 331,800
Initial Carrying Amount of the Loan
To record the direct origination costs incurred by the bank:
Principal Amount 5,000,000
Unearned interest income 100,000
Origination fees received (331,800) Cash 100,000
Direct Origination costs incurred 100,000
Because of the origination fees received and the direct
Initial Carrying Amount of Loan 4,768,200
origination costs, a new effective interest rate must be
computed
23
Module 1_Notes and Loans Receivable
ACCOUNTING FOR ORIGINATION FEES
Illustration :
After consideration of the origination fee and the direct
Global Bank granted a loan to a borrower on January 1, 2019. origination cost, the effective interest rate is determined to
The interest on the loan is 12% payable annually starting be 14%.
December 31, 2019. The loan matures in three years on
December 31, 2021. Am ortiz ation Table - Effective Interest M ethod
Interest Interest C arrying
Date Am ortiz ation
Principal amount 5,000,000 Received Incom e Am ount
Jan. 1, 2019 4,768,200
Origination fees received from borrower 331,800 Dec. 31, 2019 600,000 667,548 67,548 4,835,748
Dec. 31, 2020 600,000 677,005 77,005 4,912,753
Direct origination costs incurred 100,000 Dec. 31, 2021 600,000 687,247 87,247 5,000,000
TOTALS 1 ,8 0 0 ,0 0 0 2 ,0 3 1 ,8 0 0 2 3 1 ,8 0 0
Initial Carrying Amount of the Loan
Interest Received = Principal times nominal rate
Principal Amount 5,000,000 Interest income = Carrying Amount times effective rate
Origination fees received (331,800) Carrying Amount = Previous’ years CA plus amortization

Direct Origination costs incurred 100,000 Journal Entries on December 31, 2019
Initial Carrying Amount of Loan 4,768,200 Cash 600,000
Interest Income 600,000
Since the initial carrying amount of the loan receivable of
P4,768,200 is lower than the principal amount, it means there
is a discount and therefore the effective rate must be higher Unearned interest income 67,548
than the nominal rate of 12%. 24
Interest Income 67.548
 ACCOUNTING FOR ORIGINATION FEES
• FINANCIAL STATEMENT PRESENTATION
If a statement of Financial Position is prepared on December 31, 2019, the loan receivable is presented as follows:

Loan Receivable 5,000,000

Unearned Interest Income (231,800-67,548) (164,252)
Carrying Amount, December 31, 2019 4,835,748

25
Module 1_Notes and Loans Receivable
 Impairment of Loan
PFRS 9, paragraph 5.5.1, provides that an entity shall
recognize a loss allowance for expected credit losses on
financial asset measured at amortized cost.

• Credit losses are the present value of all cash shortfalls.

• Expected credit losses are an estimate of credit losses
over the life of the financial instrument.
Measurement of Impairment
❑The probability – weighted outcome
❑The time value of money
❑Reasonable and supportable information

26
Module 1_Notes and Loans Receivable
 IMPAIRMENT OF LOAN
Illustration :
International Bank loaned P5,000,000 to Bankard Company on January 1, 2017. Using the original effective rate of 10%, the present
value of 1 is .9091 for one period, .8264 for two
The terms of the loan require principal payment of P1,000,000 each year for 5
years plus interest at 10%. periods and .7513 for three periods.

The first principal and interest payment is due on December 31, 2017. Bankard Present Value of the Cash Flows
Company made the required payment s on Dec. 31, 2017 and Dec. 31, 2018. December 31, 2020 (500,000 x .9091) 454,550

However, during 2019, Bankard Company began to experience financial December 31, 2021 (1,000,000 x .8264) 826,400
difficulties and was unable to make the required principal and interest payment
December 31, 2022 (1,500,000 x .7513) 1,126,950
on Dec 31, 2019.
Total Present Value of Cash Flows 2,407,900
On Dec. 31 2019, International Bank assessed the collectability of the loan and
has determined that the remaining principal payments will be collected but the
collection of the interest is unlikely.
The loan receivable has a carrying amount of P3,300,000 including the accrued
interst of P300,000 on December 31, 2019. International Bank projected the
cash flows from the loan on December 31, 2019.
Date of Cash Flow Amount Projected
December 31, 2020 500,000
December 31, 2021 1,000,000
27
December 31, 2022 1,500,000
 IMPAIRMENT OF LOAN
Using the original effective rate of 10%, the present Journal Entries on December 31, 2019
value of 1 is .9091 for one period, .8264 for two
periods and .7513 for three periods. Loan Impairment Loss 892,100
Accrued Interest Receivable 300,000
Present Value of the Cash Flows
December 31, 2020 (500,000 x .9091) Allowance for Loan Impairment 592,100
454,550
December 31, 2021 (1,000,000 x .8264) Statement Presentation on December 31, 2020
826,400
Loan Receivable 3,000,000
December 31, 2022 (1,500,000 x .7513) 1,126,950
Allowance for Loan Impairment (592,100)
Total Present Value of Cash Flows 2,407,900
Carrying Amount 2,407,900

COMPUTATION OF IMPAIRMENT LOSS Journal Entries on December 31, 2020

The impairment loss is the difference between the carrying Cash 500,000
amount of the loan and the present value of the cash flows. Loan Receivable 500,000
Carrying Amount of Loan 3,300,000
Present value of Cash Flows 2,407,900 Allowance for Loan Impairment 240,790
Interest Income 240,790
Impairment Loss 892,100 28
(2,407,900 x 10%)
SAMPLE EXERCISES
Problem 7-1 (Nasty Bank)
Problem 7-3 (Pauper Bank)
Problem 7-5 (Solvent Bank)
Problem 7-9 (Moderate Bank)
Try solving the problems prior to viewing the answers
ASSIGNMENT
Problem 7-2 (Awesome Bank)
Problem 7-6 (Solvent Bank)
Problem 7-10 (Solid Bank)
 DISCOUNTING OF NOTES RECEIVABLE
Receivable Financing

31
Module 1_Notes and Loans Receivable
CONCEPT OF DISCOUNTING
As a form of receivable financing, discounting specifically pertains to note receivable

Maker → the one liable

Payee → the one entitled to payment on the date of maturity

❖ To discount the note, the payee must endorse it. Thus, payee becomes endorser and the bank
becomes endorsee.
❖ Endorsement is the transfer of right to a negotiable instrument by simply signing at the back of
the instrument
❖ Endorsement may be with recourse (endorser shall pay the endorsee if the maker dishonors the
note), or without recourse (the endorser avoids future liability even if the maker refuses to pay
the endorsee on the date of maturity).
TERMS RELATED TO DISCOUNTING OF NOTE
The discounted value of the note received by the endorser from the endorsee
Net Proceeds
(Maturity Value minus Discount)
Maturity Value Amount due on the note at the date of maturity.
(Principal plus interest)
Maturity Date Date on which the note should be paid
Principal Amount appearing on the face of the note. Also referred to as face value
Interest Amount of interest for the full term of the note
(Principal x rate x time)
Interest Rate Rate appearing on the face of the note
Time Period within which interest shall accrue. For discounting purposes, it is the period from
date of note to maturity date
Discount Amount of interest deducted by the bank in advance.
(Maturity value x discount rate x discount period)
Discount Rate Rate sed by the bank in computing the discount.
If no discount rate is given, the interest rate is safely assumed as the discount rate.
Discount Period Period of time from date of discounting to maturity date
Equals to the term of the note minus the expired portion up to the date of discounting.
Unexpired term of the note
 Discounting : Illustration 1
Sample Data of a Notes Receivable The following formula are useful to solve the
required in the problem:
✓ Date of Note : January 1, 2015
✓ Face Value : P500,000
✓ Interest Rate : 12%
✓ Time : 6 months
✓ Discounted to Bank on March 1, 2015
MV = 500,000 + (500,000 x 12% x 6/12)
MV = 500,000 + 30,000 = 530,000
✓ Discount Rate : 15%
Discount = 530,000 x 15% x 4/12
Discount = 26,500
Compute for the following :
Net Proceeds = 530,000 - 26,500
❑ Net Proceeds Net Proceeds = 503,500
❑ Gain or Loss on Discounting
Carrying Amount = 500,000 + (500,000 x 12% x 2/12)
Carrying Amount = 500,000 + 10,000 = 510,000
34 Gain or Loss on Discounting = 503,500 - 510,000
Loss = 6,500
DISCOUNTING OF NOTES RECEIVABLE

• Endorser avoids future liability even if

the maker refuses to pay the endorsee
on the date of maturity
• Sale is absolute, no contingent liability • Notes Receivable is not
• Recognize contingent liability –
recognize Notes Receivable Discounted derecognized
• Derecognize the asset (NR) • Notes Receivable Discounted is • Liability is recognized - equal to
presented as a deduction from face amount of note receivable
• Recognize gain or loss on discounting
Total Notes Receivable with
discounted
disclosure of the contingent
liability • No gain or loss recognized,
• Loss on discounting is instead recognize interest
recognized expense
 DISCOUNTING OF NOTES RECEIVABLE
Discounting Without Recourse Discounting With Recourse Discounting With
❑ Endorser avoids future liability – Conditional Sale Recourse – Secured
even if the maker refuses to pay ❑ Recognize contingent liability – Borrowing
the endorsee on the date of Notes Receivable Discounted ❑ Notes Receivable is not
maturity derecognized
❑ Notes Receivable Discounted
❑ Sale is absolute, no contingent is presented as a deduction ❑ Liability is recognized -
from Total Notes Receivable equal to face amount of
liability recognize
with disclosure of the note receivable discounted
❑ Derecognize the asset (NR) contingent liability
❑ No gain or loss
❑ Recognize gain or loss on ❑ Loss on discounting is recognized, instead
discounting recognized recognize interest
expense
36
Module 1_Notes and Loans Receivable
 Illustration : Discounting Without Recourse
Tender Company accepted from a customer a C. Net Proceeds
P4,000,000, three-month, 12% note dated August Net Proceeds = MV - Discount
31, 2015. On September 30, 2015, the entity Net Proceeds = 4,120,000 - 103,000
Net Proceeds =4,017,000
discounted without recourse the note at 15%.
D. Carrying Amount of Note Receivable
Compute for the following :
CA = Principal Bal + Accrued Interest
a. Maturity Value of the note CA = 4,000,000 + (4,000,000 x 12% x 1/12)
b. Discount CA = 4,040,000
c. Net Proceeds
d. Carrying Amount of Note Receivable at time E. Gain / Loss on Discounting
of discounting Gain / Loss = Net Proceeds - Carrying Amount
e. Gain / Loss on Discounting Gain / Loss = 4,017,000 - 4,040,000
Loss = - 23,000
A. Maturity Value of the Note
MV = Principal + Interest Journal Entry
MV = 4,000,000 + (4,000,000 x 12% x 3/12) Cash 4,017,000
MV = 4,120,000
Loss on NR Discounting 23,000
B. Discount
Discount = MV x Disc Rate x Disc Period Note Receivable 4,000,000
Discount = 4,120,000 x 15% x 2/12 Interest Income 40,000
Discount = 103,000 37
 Illustration : Discounting With
Recourse – Conditional Sale
A P2,400,000, 6 month, 12% note dated February C. Net Proceeds
1 is received from a customer by an entity and Net Proceeds = MV - Discount
discounted by First Bank on March 1 at 15%. Net Proceeds =2,544,000 - 159,000
Net Proceeds = 2,385,000
If the discounting is treated as a conditional sale, D. Carrying Amount of Note Receivable
Compute for the following : CA = Principal Bal + Accrued Interest
a. Maturity Value of the note CA = 2,400,000 + (2,400,000 x 12% x 1/12)
b. Discount CA = 2,424,000
c. Net Proceeds E. Gain / Loss on Discounting
d. Carrying Amount of Note Receivable at time Gain / Loss = Net Proceeds - Carrying Amount
Gain / Loss = 2,385,000 - 2,424,000
of discounting
Loss = 39,000
e. Gain / Loss on Discounting
Journal Entry
A. Maturity Value of the Note
MV = Principal + Interest
Cash 2,385,000
MV = 2,400,000 + (2,400,000 x 12% x 6/12) Loss on NR Discounting 39,000
MV = 2,544,000
Note Receivable Discounted 2,400,0000
B. Discount
Interest Income 24,000
Discount = MV x Disc Rate x Disc Period
The Note Receivable Discounted account is deducted from the total
Discount =2,544,000 x 15% x 5/12 38
Discount = 159,000
notes receivable when preparing the statement of financial position
with disclosure of the contingent liability
 Illustration : Discounting With
Recourse – Conditional Sale
A P2,400,000, 6 month, 12% note dated February NOTE IS DISHONORED BY MAKER
1 is received from a customer by an entity and The note is dishonored by the maker on August 1, and the entity
discounted by First Bank on March 1 at 15%. pays the First Bank the Maturity value of the note, P2,544,000, plus
protest fee and other bank charges of P6,000.
If the discounting is treated as a conditional sale,
Journal Entry Total payment is charged to accounts receivable

Cash 2,385,000 Journal Entry : Payment to First Bank

Loss on NR Discounting 39,000 Accounts Receivable 2,550,000

Note Receivable Discounted 2,400,0000 Cash 2,550,000

Interest Income 24,000

Journal Entry : Cancel the Contingent Liability
NOTE IS PAID BY MAKER ON MATURITY
On August 1, date of maturity, the note is paid by the maker to the Notes Receivable Discounted 2,400,000
First Bank. Notes Receivable 2,400,000

Journal Entry
Note Receivable Discounted 2,400,000
Notes Receivable 2,400,000 39
 Illustration : Discounting With
Recourse – Secured Borrowing
If the discounting is treated as a secured borrowing, the note receivable is not derecognized but instead an accounting
liability is recorded at an amount equal to the face amount of the note receivable discounted.
A P2,400,000, 6 month, 12% note dated February NOTE IS PAID BY MAKER ON MATURITY
1 is received from a customer by an entity and Journal Entry
discounted by First Bank on March 1 at 15%.
Liability for NR Discounted 2,400,000
If the discounting is treated as a Secured Cash 2,400,000
Borrowing:
NOTE IS DISHONORED BY MAKER
Journal Entry The note is dishonored by the maker on August 1, and the entity
Cash 2,385,000 pays the First Bank the Maturity value of the note, P2,544,000, plus
protest fee and other bank charges of P6,000.
Interest Expense 39,000
Journal Entry : Payment to First Bank
Liability for NR Discounted 2,400,0000
Accounts Receivable 2,550,000
Interest Income 24,000
Cash 2,550,000
❖ The Interest Expense can be netted against the interest income
(net interest expense of P15,000) because the discounting Journal Entry : Derecognized the Liability for NR Discounted & NR
transaction is a borrowing.
Liability for NR Discounted 2,400,000
❖ There is no Gain or Loss on Discounting. 40 Notes Receivable 2,400,000
SAMPLE EXERCISES
Problem 9-1 (Walleye Company)
Problem 9-2 (Morale Company)
Problem 9-5 (Stable Company)

Try solving the problems prior to viewing the answers

 ASSIGNMENT
Problem 9-6 (Machete Company)
Problem 9-8 (Foremost Company)
Problem 9-9 (Jolly Company)
THANK YOU!