Brian Christian S. Villaluz, Cpa

BCSVillaluz
Practical Accounting 1
HAND-OUT NO. 4: Notes Receivable
INTRODUCTION
A note receivable is a claim supported by a formal promise to pay a certain sum of money at a specific future date usually in the form
of a promissory note.
CLASSIFICATION OF NOTES RECEIVABLE

Entities classify notes as either:
1. Interest-bearing notes – they have a stated interest rate i.e., the contracted interest rate stated on the promissory note. Other
terms for stated interest rate include nominal rate, coupon rate, and face rate.
2. Noninterest-bearing notes – they do not have a stated interest rate because they include the interest element as part of the
face amount.
Trade vs. Nontrade classification

1. Trade notes receivable – these are promissory notes received from sale of goods or services in the ordinary course of
business.
2. Nontrade notes receivable – these are promissory notes received from sources other than sale of goods or services in the
ordinary course of business.
INITIAL MEASUREMENT
Receivables are initially measured at fair value plus transaction costs. For measurement purposes, receivables are classified into
the following:
1. Short-term receivable
2. Long-term receivable that bears no interest (noninterest bearing note)
3. Long-term receivable that bears a reasonable interest rate.
4. Long-term receivable that bears an unreasonable interest rate.
Short-term receivable
➢ The fair value of a short-term receivable may be equal to its face amount. However, if the transaction contains a significant
financing component, the fair value of the short-term receivable is equal to its present value.
Long-term receivable
1. Long-term receivable that bears a reasonable interest rate
➢ FAIR VALUE = Face amount
2. Long-term receivable that bears no interest rate

➢ FAIR VALUE = Present value of future cash flows discounted using an imputed interest rate.
3. Long-term receivable that bears an unreasonable interest rate

➢ FAIR VALUE = Present value of future cash flows discounted using an imputed interest rate.
Other terms for imputed rate of interest include effective interest rate, market rate, and yield rate. The difference between the present
value and the face amount is initially recognized as unearned interest and subsequently recognized as interest income under the
effective interest method.
Problem 2: (Long-term note that bears a reasonable interest rate)

Faith Company has an 8% note receivable dated July 1, 2018, in the original amount of P1,500,000. Payments of P500,000 in principal
plus accrued interest are due annually on July 1, 2019, 2020, and 2021. The market rate of interest of this kind of note is 8%.
1. How much is the interest income on the note for the year ended December 31, 2019?
2. How much is the carrying value of the note as of December 31, 2019?
BRIAN CHRISTIAN S. VILLALUZ, CPA
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Auditing (Theory and Problems) Page 1 of 3
BCSVillaluz
3. What amount should be reported as current assets in relation to the note on December 31, 2019?
Problem 3: (Long-term note that bears a reasonable interest rate)

Tusk Company sold an equipment on January 1, 2018 for P7,000,000. The company received a cash down payment of P1,000,000 and
a 4-year, 12% note for the balance.
The note is payable in equal annual installments of principal and interest of P1,975,400 payable on December 31 of each year until 2021.
1. What is the interest income for 2018?

2. What is the carrying amount of the note receivable on December 31, 2018?
Problem 4: (Noninterest-bearing note; Lump Sum Payment)

On January 1, 2019, DEXTER Company sold equipment with a carrying amount of P4,800,000 in exchange for a P6,000,000 non-interest
bearing note due January 1, 2022. There was no established exchange price for the equipment.
The prevailing rate of interest for a note of this type on January 1, 2019 was 10%. The present value of 1 at 10% for three periods is 0.75.
1. What amount should be reported as gain or loss on sale of equipment?

2. What amount should be reported as interest income for 2019?
3. How much shall be presented as current assets in relation to the note on December 31, 2019?
4. How much shall be presented as non-current assets in relation to the note on December 31, 2019?
Problem 5: (Noninterest-bearing note with installment payments; Ordinary annuity)

On January 1, 2019, DEXTER Company sold equipment with a carrying amount of P4,800,000 in exchange for a P6,000,000 non-interest
bearing note due in annual installments of P2,000,000 every December 31 starting December 31, 2019. There was no established
exchange price for the equipment.
The prevailing rate of interest for a note of this type on January 1, 2019 was 10%. The present value of 1 at 10% for three periods is 0.75
and the present value of an ordinary annuity of 1 at 10% is 2.49.
1. What amount should be reported as gain or loss on sale of equipment?

2. How much shall be presented as current assets in relation to the note on December 31, 2019?
3. How much shall be presented as non-current assets in relation to the note on December 31, 2019?
4. What amount should be reported as interest income for 2020?
Problem 6: (Noninterest-bearing note with installment payments; Annuity Due)

On January 1, 2018, AA Company sold goods to BB Company. BB Company signed a non-interest bearing note requiring payment of
P600,000 annually for seven years. The first payment was made on January 1, 2018. The prevailing rate of interest for this type of note
at date of issuance was 10%.
PV of an ordinary annuity of 1 at 10% for 6 periods 4.36

PV of an ordinary annuity of 1 at 10% for 7 periods 4.87
1. What amount should be recorded as sales revenue in January 2018?


BCSVillaluz
Problem 7: (Long-term note that bears an unreasonable interest rate; One-time principal collection with periodic interest
collection; Discount on notes) [WITH ANSWERS]
On January 1, 2018, Solid Co. sold an equipment to Liquid Co. Liquid Co. issued a 4-year, P100,000, 10% note to Solid Co. The note
requires interest to be paid annually every December 31 starting December 31, 2018. The equipment has a cost of P500,000 and
accumulated depreciation as of January 1, 2018 of P350,000. The prevailing interest rate for a note of this type is 16%. (Round off PV
factors to four decimal places)
1. Compute for the following as of December 31, 2018:

a. Gain or loss on sale of equipment.
b. Interest income
c. Current portion of the notes receivable
d. Noncurrent portion of the notes receivable
2. Prepare all the necessary entries in 2018.
Problem 8: (Long-term note that bears an unreasonable interest rate; installment principal collection with periodic interest
collection; Discount on notes)
requires the principal amount to be paid in four equal annual installments and interest on the unpaid balance to be paid annually every
December 31 starting December 31, 2018. The equipment has a cost of P500,000 and accumulated depreciation as of January 1, 2018
of P350,000. The prevailing interest rate for a note of this type is 16% (Round off PV factors to four decimal places).

b. Interest income.
c. Current portion of the notes receivable.
Problem 8: (Long-term note that bears an unreasonable interest rate; installment principal collection with periodic interest
collection; Premium on notes)
requires the principal amount to be paid in four equal annual installments and interest on the unpaid balance to be paid annually every
December 31 starting December 31, 2018. The equipment has a cost of P500,000 and accumulated depreciation as of January 1, 2018
of P350,000. The prevailing interest rate for a note of this type is 10% (Round off PV factors to four decimal places).

b. Interest income.
c. Current portion of the notes receivable.
END OF HANDOUT


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CLASSIFICATION OF NOTES RECEIVABLE

Trade vs. Nontrade classification

2. Long-term receivable that bears no interest rate

3. Long-term receivable that bears an unreasonable interest rate

Problem 2: (Long-term note that bears a reasonable interest rate)

Problem 3: (Long-term note that bears a reasonable interest rate)

1. What is the interest income for 2018?

Problem 4: (Noninterest-bearing note; Lump Sum Payment)

1. What amount should be reported as gain or loss on sale of equipment?

Problem 5: (Noninterest-bearing note with installment payments; Ordinary annuity)

1. What amount should be reported as gain or loss on sale of equipment?

Problem 6: (Noninterest-bearing note with installment payments; Annuity Due)

PV of an ordinary annuity of 1 at 10% for 6 periods 4.36

1. What amount should be recorded as sales revenue in January 2018?

BRIAN CHRISTIAN S. VILLALUZ, CPA

1. Compute for the following as of December 31, 2018:

1. Compute for the following as of December 31, 2018:

1. Compute for the following as of December 31, 2018:

BRIAN CHRISTIAN S. VILLALUZ, CPA

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