Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 331 views

    Notes Receivable (Chapter 6)

    Uploaded by

    ching
    This document provides an overview of notes receivable, including: - Notes receivable represent formal promises to pay, usually in the form of negotiable promissory notes. - Notes are initially measured at present value for long-term notes or face value for short-term notes. - Subsequently, notes are measured at amortized cost using the effective interest method. This involves adjusting the initial amount for principal payments, amortization of discounts/premiums, and reductions for impairment. - The document also discusses concepts like time value of money, compounding interest, and present vs future value as they relate to measuring notes receivable.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Notes Receivable (Chapter 6)

    Uploaded by

    ching
    331 views19 pages
    This document provides an overview of notes receivable, including: - Notes receivable represent formal promises to pay, usually in the form of negotiable promissory notes. - Notes are initially measured at present value for long-term notes or face value for short-term notes. - Subsequently, notes are measured at amortized cost using the effective interest method. This involves adjusting the initial amount for principal payments, amortization of discounts/premiums, and reductions for impairment. - The document also discusses concepts like time value of money, compounding interest, and present vs future value as they relate to measuring notes receivable.

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document provides an overview of notes receivable, including: - Notes receivable represent formal promises to pay, usually in the form of negotiable promissory notes. - Notes are initially measured at present value for long-term notes or face value for short-term notes. - Subsequently, notes are measured at amortized cost using the effective interest method. This involves adjusting the initial amount for principal payments, amortization of discounts/premiums, and reductions for impairment. - The document also discusses concepts like time value of money, compounding interest, and present vs future value as they relate to measuring notes receivable.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    331 views19 pages

    Notes Receivable (Chapter 6)

    Uploaded by

    ching
    This document provides an overview of notes receivable, including: - Notes receivable represent formal promises to pay, usually in the form of negotiable promissory notes. - Notes are initially measured at present value for long-term notes or face value for short-term notes. - Subsequently, notes are measured at amortized cost using the effective interest method. This involves adjusting the initial amount for principal payments, amortization of discounts/premiums, and reductions for impairment. - The document also discusses concepts like time value of money, compounding interest, and present vs future value as they relate to measuring notes receivable.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 19

    NOTES RECEIVABLE

    Reference: Intermediate Accounting Volume 1 2020 Edition


    by Conrado Valix, Jose F. Peralta and Christian Aris M. Valix
    Chapter 6: Notes Receivable

    After studying this chapter, one should be able to:


    o To understand the concept and nature of notes receivable
    o To know the initial and subsequent measurement of notes
    receivable
    o To know the accounting for interest – bearing note
    receivable
    o To know the accounting for non-interest bearing note
    receivable
    Definition
    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.
    Notes receivable represents only claims arising from sale of
    merchandise or service in the ordinary course of business.
    Dishonored notes
    A promissory note matures and is not paid.
    Theoretically, dishonored notes receivable should
    be removed from the notes receivable account and
    transferred to accounts receivable.
    The amount debited to accounts receivable should
    include the face amount, interest and other charges.
    Initial Measurement of Notes Receivable
    Conceptually, notes receivable shall be measured initially at
    present value.
    The present value is the sum of all future cash flows
    discounted using the prevailing market rate of interest for similar
    notes.
    The prevailing market rate if interest is actually the effective
    interest rate.
    Short-term notes receivable shall be measured at face
    value.
    INITIAL MEASUREMENT

    Long Term Notes


    In General Long Term Notes (Non Interest
    (Conceptual) Short Term Notes (Interest Bearing) Bearing)

    NR should be measured at Face Value upon


    at Face Value at Present Value (PV)
    initially at Present Value (PV) issuance

    Actually, all notes


    **sum of all future implicitly contain interest.
    Why not PV? It is Interest bearing since it is
    cashflows discounted using It was called a non
    immaterial to compute explicitly stated in the
    the effective interest rate interest simply because
    the PV contract the % of interest
    (prevailing market rate) interest is
    (unlike interest bearing)
    SUBSEQUENT MEASUREMENT

    Long Term Notes


    Long Term Notes (Non Interest
    Short Term Notes (Interest Bearing) Bearing)
    at AMORTIZED COST
    using the effective
    interest method
    at AMORTIZED COST
    at Face Value using the effective PV + Amortization of the
    interest method discount or Face Value
    minus unamortized
    unearned interest
    income
    Interest-bearing notes receivable
    The initial measurement of long – term notes will depend on
    whether the notes are interest-bearing or non-interest bearing.

    Interest-bearing long term notes are measured at face value


    which is actually the present value upon issuance.
    Time Value of Money Concept and
    Compounding of Interest

    Time Value of Money

    1990s Today 2030


    Present Value Future Value
    P1,000
    Purchasing Power Inflation
    Simple Interest vs. Compounding of
    Interest
    Principal Amount P10,000
    Interest Rate 10% per year
    Time period 2 years
    Simple Interest Compounded Interest
    First year 10k x 10% = P1,000 First year 10k x 10% = P1,000
    2nd year 10k x 10% = 1,000 2nd year 11k x 10% = 1,100
    Total = P2,000 = P 2,100
    Present value and Future value
    When you were young, your grandmother gave
    you a certain amount of money but you don’t
    remember how much it was. You decided to put
    this amount to the bank for 7 years with 6%
    interest rate and become P100 after 7 years.
    Question, how much was the amount given to you
    at the beginning?
    Present Value 6% interest rate for 7 years Future Value
    (PV) (FV)

    PV (???) PV = FV x P 100
    P66.51

    PV = FV x (1 + r)
    =100 x 0.665
    = P66.51
    Explaining the Concept of PV and FV

    Present Value – What today’s value of tomorrow’s cash before


    the interest rate is applied in the money?

    Future Value – What is tomorrow’s value of today’s cash after


    we applied in the interest rate in the money?
    Present Value 6% interest rate for 7 years Future Value
    (PV) (FV)

    PV (???) PV = FV x P 100
    P66.51

    FV= PV x (1 + r)
    =66.51 x 1.5036
    = P100
    1, PV of 1 = one time payment
    2. PV of Ordinary Annuity of 1 = installment payment
    3. PV of Annuity Due of 1 = installment payment (payment there’s at the beginning of
    the contract)
    Noninterest-bearing notes receivable
    Non-interest bearing long term notes are measured at present
    value which is discounted value of the future cash flows using
    the effective interest rate.
    Actually, the term “noninterest-bearing” is a misnomer
    because all notes implicitly contain interest.
    It is simply a case of the “interest being included in the face
    amount” rather than being stated as a separate rate.
    Subsequent measurement

    Subsequent to initial recognition, long term notes


    receivable shall be measured at amortized cost using the
    effective interest method.
    The amortized cost measurement is in accordance
    with PFRS 9, paragraph 5.2.1.
    Meaning of Amortized Cost
    The amortized 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.

    You might also like