05 Notes Receivable
05 Notes Receivable
CALOOCAN CITY
LEARNING OBJECTIVES:
1. Gain or loss on from sale in which promissory note was the consideration received
2. Sales revenue in which promissory note was the consideration received
3. Initial measurement of notes receivable
4. Subsequent measurement of notes receivable
5. Interest income
6. Interest receivable
7. Current and noncurrent classification of notes receivable
REVIEW NOTES:
Notes Receivable – are claims supported by formal promises to pay usually in the form of notes. It is a written
contract in which one person promises to pay another person a definite sum of money.
Lending of cash to
Usual reason of Sale of goods, services, Lending of cash for
debtors in ordinary
issuance or PPE passive income
course of business
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Gain or Loss from Sale of Asset or Services:
Notes are usually received from sale of PPE, inventories or services. When notes are received in exchange for
PPE that was sold, gain or loss from sale maybe asked:
Fair value of NR P XX
Down payment XX
Total FV of consideration received P XX
Carrying amount of PPE sold ( XX)
Gain or (loss) from sale P XX
If what was sold are inventory or service, the sales or revenue is measured at total fair value of consideration
received.
PV of principal P XX
PV of nominal interest (if any) XX
Fair value of the notes received P XX
In the above exception, the effective interest rate should be computed if not given in the problem using trial and
error and interpolation if necessary.
Interest-Bearing Notes:
(a) Initial measurement (FV) – face amount
(b) Subsequent measurement (AC) – remaining face amount
(c) Interest income (EI) – face amount * nominal interest rate
(d) Interest receivable – face amount * nominal interest rate
(e) Non-current portion – face amount payable beyond 1 year
(f) Current portion – face amount payable within 1 year
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Noninterest-Bearing Notes:
(a) Initial measurement (FV) – PV of principal
(b) Subsequent measurement:
Term note: Whole carrying amount if payable beyond one year. None if payable within one year.
Serial note:
Term note: Whole carrying amount if payable within one year. None if payable beyond one year.
Serial note:
PV of principal P XX
Add: PV of nominal interest XX
Initial measurement P XX
Term note: Whole carrying amount if payable beyond one year. None if payable within one year.
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Serial note:
Term note: Whole carrying amount if payable within one year. None if payable beyond one year.
Serial note:
Interest Receivable:
The interest receivable is equal to the nominal interest less any payments made. Stated otherwise, it is equal to
the nominal interest pro-rated by the number of months unpaid. The number of months unpaid is from the last
interest payment date up to December 31 (or reporting period).
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DISCUSSION:
2. Assuming that the ideal measure of short-term receivable in the balance sheet is the discounted value of
the cash to be received in the future, failure to follow this practice usually does not make the balance sheet
misleading because
a. The amount of discount is not material
b. Most receivables can be sold to a bank or factor
c. Most short-term receivables are not interest-bearing
d. The allowance for uncollectible accounts includes a discount element
Numbers 6-10
On January 1, 2021, Mulawin Company sold equipment with a carrying amount of P4,800,000 in exchange for
P6,000,000 noninterest-bearing note due January 1, 2024. There was no established exchange price for the
equipment.
The prevailing interest rate for this note was 10%. The present value of 1 at 10% for three periods is 0.75.
The carrying amount of the building is P4,200,000. Assume prevailing interest rate for a note of this type is
12%.
12. How much is the interest income for the year 2021?
a. 600,000 c. 432,324
b. 492,324 d. 540,000
Numbers 16-17
On January 1, 2022, Hotel Company sold machinery with historical cost of P3,000,000 and accumulated
depreciation of P900,000 in exchange for a 3-year, P2,100,000 noninterest-bearing note receivable due in
equal semi-annual payments every July 1 and December 31 starting on July 1, 2022.
The prevailing rate of interest for this type of note is 10%. Information on present value factors is as follows:
PV of PV of annuity of
Periods 1 at 5% 1 at 5%
3 0.8638 2.7235
6 0.7462 5.0757
17. How much is the carrying amount of the receivable on December 31, 2022?
a. 1,241,086 c. 1,690,059
b. 982,381 d. 1,594,396
Numbers 14 and 15
On March 1, 2020, Namami Company sold goods to Zomiso Company. Zomiso singed a non-interest bearing
note requiring payment of P60,000 annually for seven years. The first payment was made on March 1, 2020. The
prevailing interest for this type of note at the date of issuance was 10%. Information on present value factors is
as follows:
Numbers 20-23
On December 31, 2020, You Bring Out The Best In Me Like No One Else Can Do Company finished consultation
services and accepted in exchange a promissory note with a face value of P200,000, due date of December 31,
2023, and a stated rate of 5%, with interest receivable at the end of each year.
The fair value of the services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following
interest factors are provided:
20. What is the amount of consultation service revenue to be present in the company’s income statement?
a. 175,133 c. 150,264
b. 24,869 d. 200,000
21. What is the amount of interest income for the year 2021?
a. 17,513 c. 20,000
b. 10,000 d. 7,513
23. What is the current and noncurrent portion of the notes receivable as of December 31, 2022?
24. What of the following items is not matched correctly with its basis of valuation for purposes of reporting on
the statement of financial position?
a. Investment in trading securities -> fair value
b. Long-term interest note with unrealistic rates -> face value
c. Inventories of broker traders -> fair value less cost to sell
d. Bearer plant -> cost less accumulated depreciation and accumulated impairment loss
25. The balance sheet of ARC Reserve Your Seat Now! Company reported the following long-term receivable as
of December 31, 2020:
The following are transactions during 2021 and other information pertaining to the company’s long term
receivables:
a. The note receivable form sale of plant bears interest at 12% per annum. The note is payable in 3
annual installments of P1,500,000 plus interest on the unpaid balance every April 1. The initial principal
and interest payment was made on April 1, 2021
b. The note receivable from officer is dated December 31, 2020, earns interest at 10% per annum, and
is due on December 31, 2021. The 2021 interest was received on December 31, 2021
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Numbers 26-30
On January 1, 2022, Stain Company sold a delivery equipment costing P1,000,000 with accumulated
depreciation of P150,000 in exchange of a three year, 10%, P1,800,000 interest bearing note. The note is
collectible in equal annual amount starting December 31, 2022 including interest.
The prevailing rate of interest of similar note on this date was at 12%. The following interest factors are provided:
28. How much is the carrying amount of the note on December 31, 2022?
a. 1,349,136 c. 1,200,000
b. 1,769,136 d. 1,169,136
29. How much is the current portion of the note on December 31, 2022?
a. 639,704 c. 589,432
b. 579,704 d. 600,000
30. How much is the noncurrent portion of the note on December 31, 2022?
a. 529,244 c. 589,244
b. 501,986 d. 20,287
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