FINANCIAL ACCOUNTING & REPORTING 1
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Accounting for Receivables (Part 3)
Module 008Accounting for Receivables (Part 3)
A note or draft that provides for the payment of interest for the period
between the issuance date and the due date is called an interest-bearing note.
On the date of the receipt of the note, the present value of the interest-
bearing note, which bears a realistic interest rate, is equal to the face value.
Subsequent to the date of the note or the draft, the present value of an
interest-bearing note is equal to its face value plus accrued interest. An entity
shall assess at each reporting date whether there is objective evidence that
its receivable or group of receivables is impaired. Impairment losses are
incurred, and an impairment loss is recognized in profit or loss in the
statement of comprehensive income if `there is objective evidence of
impairment as a result of one or more events that occurred after the initial
recognition of the receivable, and the impact on the estimated future cash
flows of the receivable can be reliably measured.
At the end of this module, you will be able to:
1. Understand the accounting for an interest-bearing note
2. Explain notes/loans receivable impairment and uncollectibility
The common application of the lessons that are under this module is in
connection with how to account for the note that bears interest. You will be
exposed to notes with discounts and premiums.
Accounting for notes/loans receivable (Interest-bearing notes)
Notes receivable is a formal claim against another that is evidenced by a written promise,
called a promissory note, or a written order to pay at a later time called a time draft.
A promissory note is an unconditional written agreement to pay a certain sum of money on
a specific or determinable date to order of the payee or bearer.
Initial Measurement
Notes receivable shall be measured initially at the present value. 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 of interest is actually the effective interest rate.
Short Term – at face value
Long Term
• Interest bearing – measured at face value.
• Non-interest-bearing – measured at a present value which is the discounted value of
future cash flows using the effective interest rate.
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Accounting for Receivables (Part 3)
Rate Note is at
Stated = Effective Rate Face value
Stated > Effective Rate Premium
Stated < Effective Rate Discount
Subsequent Measurement
Based on IAS 39, loans and receivables shall be measured in the statement of financial
position at amortized cost using the effective interest method. The amortized cost is
the ledger balance of Notes receivable plus any remaining balance of Premium on
Notes Receivable or minus the remaining balance of Discount on Notes Receivable.
Interest-bearing noted
A note or draft that provides for the payment of interest for the period between the
issuance date and the due date is called an interest-bearing note.
On the date of the receipt of the note, the present value of the interest-bearing note, which
bears a realistic interest rate, is equal to the face value. Subsequent to the date of the note
or the draft, the present value of an interest-bearing note is equal to its face value plus
accrued interest.
The formula for computing interest
The formula for computing interest on an interest-bearing note is (PRT):
𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 𝒐𝒇 𝒕𝒉𝒆 𝒏𝒐𝒕𝒆 𝒙 𝑹𝒂𝒕𝒆 𝒐𝒇 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒙 𝑻𝒆𝒓𝒎 𝒐𝒇 𝒕𝒉𝒆 𝒏𝒐𝒕𝒆 = 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕
Principal - is the face value of the note.
Rate of Interest – percentage specified on the note on an annual basis.
Term –is the period of time the interest will run. It is usually based on a 360-day year
unless it was stated in the problem to find the weighted average interest.
Example 1: Note Issued at Face Value
On January 1, 2017, Allan Manufacturing sold equipment costing P800,000 with
accumulated depreciation of P450,000. The company receives as consideration
P100,000 and a 15% interest-bearing note for P400,000 due on Dec. 31, 2017. The
prevailing interest rate for a note of this type is 15%.
2017
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Accounting for Receivables (Part 3)
Jan. 1 Cash 100,000
Notes receivable 400.000
Accumulated Dep.– Equipment 450,000
Equipment 800,000
Gain on Sale of Equipment 150,000
Sales Price (100,000+400,000) 500,000
Carrying Value (800,000-450,000) 350,000
Gain on Sale 150,000
The following are the entries relating to the note:
2017
Dec. 31 Cash 60,000
Interest Revenue 60,000
2018
Dec. 31 Cash 60,000
Interest Revenue 60,000
2019
Dec. 31 Cash 460,000
Notes Receivable 400,000
Interest Revenue 60,000
On the statement of financial position on Dec. 31, 2017, the Notes receivable of
P400,000 would be shown as part of non-current financial assets because it is
scheduled for collection two years from the end of the reporting period.
On Dec.31, 2018, the same note will be classified as part of current assets
because it is expected to be collected within 12 months from the date.
Example 1: Interest-bearing note
Long-term installment note receivable (stated rate<market rate)
On January 1, 2017, Allan Manufacturing sold a tract of land that originally cost
P400,000 with accumulated depreciation of P450,000. Allan received a P600,000
note as payment for this transaction. The note is payable in 3 annual installments of
P200,000 beginning Dec. 31, 2017, plus interest at the rate of 4% based on the
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Accounting for Receivables (Part 3)
outstanding balance. On Jan. 1, 2017, the prevailing rate of interest for a similar
obligation was 10%.
The computation of the present value of the note on Jan. 1, 2017, is as follows:
PV of the Note:
Face Value of the Note 600,000
Present Value of the Note 538,424
Discount 61,576
Sales Price 538,424
Carrying Value 400,000
Gain on Sale 138,424
The following are the entries relating to the note:
2017
Jan. 1 Notes Receivable 600,000
Discount on Notes 61,576
Land 400,000
Gain on sale 138,424
2017
Dec. 31 Cash 224,000
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Accounting for Receivables (Part 3)
Discount on Notes 29,842
Notes Receivable 200,000
Interest Revenue 53,842
2018
Dec. 31 Cash 216,000
Discount on Notes 20,827
Notes Receivable 200,000
Interest Revenue 36,827
2019
Dec. 31 Cash 208,000
Discount on Notes 10,907
Notes Receivable 200,000
Interest Revenue 18,907
Amortization Table
Date Principal Effective Nominal Discount Carrying
Payment Interest Amount Amortization Value
Jan. 1, 2017 538,424
Dec. 31, 2017 200,000 53,842 24,000 29,842 368,266
Dec. 31, 2018 200,000 36,827 16,000 20,827 189,093
Dec. 31, 2019 200,000 18,907 8,000 10,907 -
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Accounting for Receivables (Part 3)
The balance of the Notes Receivable and the related Discount on Notes on Dec. 31, 2017, is
as follows:
Total Current Non-current
Notes Receivable 400,000 200,000 200,000
Discount on Notes 36,734 20,827 10,907
Carrying Amount 368,266 179,173 189,093
Example2: Interest-bearing note
Long-term installment note receivable (stated rate>market rate)
On January 1, 2017, Allan Manufacturing sold a tract of land that originally cost
P400,000 with accumulated depreciation of P450,000. Allan received a P600,000
note as payment for this transaction. The note is payable in 3 annual installments of
P200,000 beginning Dec. 31, 2017, plus interest at the rate of 14% based on the
outstanding balance. On Jan. 1, 2017, the prevailing rate of interest for a similar
obligation was 10%.
The computation of the present value of the note on Jan. 1, 2017, is as follows:
PV of the Note:
200,000 + (600,000X14%) x 0.90909 = 258,182
200,000 + (400,000X14%) x 0.82645 = 211,571
200,000 + (200,000X14%) x 0.90909 = 171,301
Total 641,054
Present Value of the Note 641,054
Face Value of the Note 600,000
Premium 41,054
Sales Price 641,054
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Carrying Value 400,000
Gain on Sale 241,054
The following are the entries relating to the note:
2017
Jan. 1 Notes Receivable 600,000
Premium on Notes 41,054
Land 400,000
Gain on sale 241,054
2017
Dec. 31 Cash 284,000
Notes Receivable 200,000
Interest Revenue 64,105
Premium on Notes 19,895
2018
Dec. 31 Cash 256,000
Notes Receivable 200,000
Interest Revenue 42,116
Premium on Notes 13,884
2019
Dec. 31 Cash 228,000
Notes Receivable 200,000
Interest Revenue 20,725
Premium on Notes 7,275
Amortization Table
Date Principal Effective Nominal Premium Carrying
Payment Interest Amount Amortization Value
Jan. 1, 2017 641,054
Dec. 31, 2017 200,000 64,105 84,000 19,895 421,159
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Accounting for Receivables (Part 3)
Dec. 31, 2018 200,000 42,116 56,000 13,884 207,725
Dec. 31, 2019 200,000 20,725 28,000 7,275 -
The balance of the Notes Receivable and the related Premium on Notes on Dec. 31, 2017, is
as follows:
Total Current Non-current
Notes Receivable 400,000 200,000 200,000
Premium on Notes 21,159 13,884 7,725
Carrying Amount 421,159 213,884 207,725
Notes/loans receivable impairment and uncollectibility
An entity shall assess at each reporting date whether there is an objective evidence that its
receivable or group of receivables is impaired. Impairment losses are incurred, and an
impairment loss is recognized in profit or loss in the statement of comprehensive income if
1. There is objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the receivable; and
2. The impact on the estimated future cash flows of the receivable can be reliably
measured.
Dishonor
When a promissory note matures and is not paid, it is said to be dishonored. Theoretically,
dishonored notes shall be removed from the notes receivable account and transferred to
accounts receivable at an amount to include, if any, interest and other charges.
Accounts receivable xxx
Notes receivable xxx
Glossary
Discount on Notes Payable: Contra-asset account that arises when the market rate is
greater than the stated rate.
Impairment Loss: the decline in value of an asset due to a loss event that indicates a
negative effect on the estimated cash flows to be received from the customer.
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Accounting for Receivables (Part 3)
Premium on Notes Payable: an account that arises when the market rate is less than the
stated rate.
Principal: is the face value of the note.
Rate of Interest: percentage specified on the note on an annual basis.
Term: is the period of time the interest will run. It is usually based on a 360-day year
unless it was stated in the problem to find the weighted average interest.
References and Supplementary Materials
Books and Journals
1. Robles, N. S., &Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1).
Manila, Philippines.
2. Valix, C. T., Peralta, J. F., &Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
1).Manila, Philippines.
3. Valix, C. T., Peralta, J. F., &Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
2).Manila, Philippines.
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Accounting for Receivables (Part 3)
Online Supplementary Reading Materials
1. 14.2 The Issuance of Notes and Bonds;
http://open.lib.umn.edu/financialaccounting/chapter/14-2-the-issuance-of-notes-
and-bonds/;19 October 2017
2. 14.6 Bonds with Other Than Annual Interest Payments;
http://open.lib.umn.edu/financialaccounting/chapter/14-6-bonds-with-other-than-
annual-interest-payments/;19 October 2017
Online Instructional Videos
1. Accounting for Receivables;
https://www.youtube.com/watch?v=ecm1kSCa6MI; 18 October 2017
2. Financial Accounting - Receivables;
https://www.youtube.com/watch?v=bO6lpdKy6hc; 18 October 2017
3. Accounting for Receivables;
https://www.youtube.com/watch?v=PJSxQu8uqNU; 18 October 2017
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