Notes Receivable

- are claims supported by formal

promises to pay usually in the
form of notes.
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.
Dishonored Notes
- when a promissory notes
matures and is not paid.
 Initial measurement of notes receivable
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 for similar notes.

However, short-term notes receivable shall be measured at face

value.
Interest-bearing notes receivable
The initial measurement of long-term notes will
depend on whether the notes are interest-bearing or
noninterest-bearing.

Interest-bearing long term notes are measured at

face value which is actually the present value upon
issuance.
Noninterest-bearing notes receivable

Noninterest long-term notes are measured at

present value whuch is the discounted value of
the future cash flows using the effective interest
rate.
Subsequent measurement
Subsequent to initial recognition, long-
term notes receivable shall be measured at
amortized cost using the effective interest
method.
Meaning of amortized cost
The “amortization cost” is the amount at which the
note receivable is measured 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
For long-term noninterest-bearing notes
receivable, the amortized cost is the
present value plus amortization of the
discount, or the face value minus the
unamortized unearned interest income.
Illustration – Interest bearing note
An entity owned a tract of land costing P800,000
and sold the land for P1,000,000.

The entity received a 3-year note for P1,000,000

plus interesr of 12% compounded annually.
 Journal entries
First Year
Note receivable 1,000,000
Land 800,000
Gain on sale of Land 200,00

Accrued interest receivable 120,000

Interest Income 120,000
Journal entries (continuation)
Second Year
Accrued interest receivable 134,400
Interest income 134,400

Face Value 1,000,000

Interest accrued for firsr year 120,000
Total 1,120,000
Interesr for second year 134,400
Journal entries (continuation)
Third Year
Cash 1,404,928
Notes receivable 1,000,000
Accrued interest receivable 254,400
Interest income 150,528

Face Value 1,000,000

Interest accrued:
First year 120,000
Second year 134,400 254,400
Total 1,254,000
Interest for Third year 150,528
Cash received 1,404,928