Notes Receivable

Notes Receivable
Claims supported by formal promises to pay usually in the form of notes.

Notes receivables represents only in claims arising from sales of
merchandise or service in the ordinary course of business
Notes receivable from officers, shareholders, affiliates shall be

designated seperately from notes receivable
Dishonored notes
When a promissory note matures and is not paid, shall be considered as
Dishonored
It should remove from notes receivable accounts including interest, and

transferred to accounts receivable.
Initial Measurement ( for Long term notes)
Short term receivable should be measured at face value whether if its

interest or noninterest bearing since the discount is usually not
material
Long term Interest Bearing - Should be measured at FACE VALUE

Long term Noninterest-bearing - Should be measure at PRESENT VALUE
Present Value - a value to be expected or the sum of all future cash

flows discounted using the effective interest rate or prevailing market
rate.
Face Value - The true value of the note.
Subsequent Measurement
Amortization cost using the effective interest method (only applies to
long term nonbearing-interest). It acts like a Net realizable value since
you deduct or add certain things to come up with the cost. Things to
add or deduct;
 Minus Principal repayment
 Plus or minus cumulative amortization depending on the difference
between the initial carrying amount and principal maturity amount
(maturity value)
 Minus reduction for impairment or uncollectibility
Interest Bearing journalizing guideline
Notes receivable should be recognize at its face value during the first
journal entry and the amount of interest that is based from the face
value (Accrued Interest Receivable)
Notes Receivable *Face Value*

Sale or Service *stated cost*
Gain *balancing amount*
Accrued interest receivable *Interest based from face value*

Interest Income *same amount*
Subsequent transaction:
Accrued interest receivable *Interest based from face value*
Interest Income *same amount*
If the problem stated compounding annually or monthly, the value of the

subsequent payment should based on the sum of the face value and
accrued interest
Subsequent Transaction:
Cash *maturity value*
Notes receivable *face value of the note*
Accrued Interest receivable *total amount of interest*
Interest Income *amount of interest gain*
Nonbearing Interest computation and journalizing guideline (Cash Price
and Installment)
Initially, Notes Receivable should be measured through Present Value.

 Face Value - Present Value = Unearned Interest Income (Subject to
amortization)
 Gain of sale or Gross Income = (Sale price or Cash Price - Cost of the
goods)
The Cash Price stands up as a present value

Journalizing of sale
Notes Receivable *420,000*
Sale *330,000*
Unearned Interest Income *420,000-330,000=90,000*
Collection for subsequent transaction Journal

It is stated in the problem that the payable is equally paid for 3 years;
the collection for the first year will be;
Cash *420,000/3= 140,000*
Notes Receivable *140,000*
To recognize the Interest earned. Find the carrying amount of the notes
receivable per subsequent payment and sum it up.
Year 1: 420,000
Year 2: *420,000 - 140,000* 280,000
Year 3: *420,000 - 140,000 - 1400,00* 140,000
Total: 840,000
To find the interest income that is earned every payment, Divide the
carrying amount of every year (420,000 = 280,000 = 140,000) to the total
of the notes receivable of every year (840,000) and multiply to the
unearned interest income to find the earned income
Year 1: 420,000/840,000 x 90,000 = 45,000

Year 2: 280,000/840,000 x 90,000 = 30,000
Year 3: 140,000/840,000 x 90,000 = 15,000
Journalize the interest income earned for the first year;
Unearned Interest income 45,000

Interest Income 45,000
Nonbearing Interest computation and journalizing guideline (Prevailing
Interest Rate; Payment In Series; No Stated Cash price for gain of sale)
As always, find the unearned Interest Income and Gain of sale

 Face Value of the note (300,000) - Present Value of the note
(100,000 x 2.4869 = 248,690) = Unearned Interest Income
(51,310)6555
Since theres no stated cash price to identify the gains of sale, we have to
find the price ourselves. By multiplying the annual installment of the
300,000 (100,000 per year) to the present value factor (2.4869) you will
find the Present Value. Once you found the present value, sum it up to
the down payment (if given, disregard if not) to find the true value of
sale price. Lastly, you subtract it to the cost of the goods to find the gain
of sale
 100,000 x 2.4869 = 248,690
 248,690 + 100,000 = 348,690 Cash Price (Present Value)
 348,690 - 230,000 = 118,690 (Gain of Sale)
To find the interest earned every subsequent payments. Provide an

Amortization Schedule
Date Collection Interest Principal Present

Income Value
Jan 1 248,690
Dec 31 2020 100,000 24,869 75,131 173,559
Dec 31 2021 100,000 17,356 82,644 90,915
Dec 31 2022 100,000 9,085 90,915 -------
Journalizing of sale
Recognize the down payment as debit cash and face value of debit notes
receivable. Indicate the cost of the goods, gain of sale, unearned
interest income as debit and make sure they balance.
Cash 100,000
Notes Receivable 300,000
Equipment 230,000
Gain of sale 118,690
Unearned Interest Income 51,310
Notes to remember:
Present value is the amount of cash received in the future that is
determined by the effective rate, prevailing market rate/market rate,
and ordinary annuity.
Unearned interest income is an interest that is determined in non-

interest bearing notes to identify how much of the interest in that note
contain
Cash price is the value of the product that is use for it to be sold.
Gain on sale/gross income is the difference of the cost of goods sold and
value of cash that is received

Notes Receivable

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Notes Receivable

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Notes Receivable

Claims supported by formal promises to pay usually in the form of notes.

Notes receivable from officers, shareholders, affiliates shall be

It should remove from notes receivable accounts including interest, and

Initial Measurement ( for Long term notes)

Short term receivable should be measured at face value whether if its

Long term Interest Bearing - Should be measured at FACE VALUE

Present Value - a value to be expected or the sum of all future cash

Notes Receivable *Face Value*

Accrued interest receivable *Interest based from face value*

If the problem stated compounding annually or monthly, the value of the

Initially, Notes Receivable should be measured through Present Value.

The Cash Price stands up as a present value

Collection for subsequent transaction Journal

Year 1: 420,000/840,000 x 90,000 = 45,000

Journalize the interest income earned for the first year;

Unearned Interest income 45,000

As always, find the unearned Interest Income and Gain of sale

To find the interest earned every subsequent payments. Provide an

Date Collection Interest Principal Present

Unearned interest income is an interest that is determined in non-

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