Notes Receivable
Competency Appraisal
• Notes receivable are claims supported by formal
promises to pay, usually in the form of notes. A
promissory note is a written contract in which
the maker promises to pay the payee a definite
sum of money on demand or at a definite future
date.
• The term "notes receivable" refers only to claims
arising from the sale of merchandise or services
in the ordinary course of business. Notes
received from officers, employees, shareholders,
and affiliates should be designated separately.
• Dishonored notes are those that mature and are not
paid. They should be removed from the notes receivable
account and transferred to accounts receivable at an
amount that includes any interest and charges.
• Notes receivable should be initially measured at their
present value, which is the sum of all future cash flows
discounted using the prevailing market rate of interest
for similar notes. Short-term notes receivable are
measured at face value and are not discounted. The
initial measurement of long-term notes depends on
whether they are interest-bearing or noninterestbearing.
• The approach of transferring dishonored notes to
accounts receivable is defended on the grounds that the
overdue note has lost part of its status as a negotiable
instrument and represents only an ordinary claim
against the maker.
• Interest-bearing notes are measured at face value,
which is the present value at the time of issuance, while
noninterest-bearing notes are measured at present
value, which is the discounted value of future cash flows
using the effective interest rate. Although noninterestbearing notes do not have an explicit interest rate, they
implicitly contain interest, which is included in the face
value.
• After initial recognition, long-term notes receivable are
measured at amortized cost using the effective interest
method, which calculates the present value of the note
based on principal repayments, amortization of any
remaining amount, and any reductions for impairment
or uncollectible amounts. For noninterest-bearing
notes, the amortized cost is the present value plus the
amortization of the discount, or the face value.
• These concepts apply to both interest-bearing and
noninterest-bearing long-term notes. Interest income is
only relevant for long-term notes receivable, and the
effective interest rate method is used to measure and
account for such notes.
NOTES RECEIVABLE
QUIZZER
1. Balentime Company has an 8% note receivable
dated June 30, 2019, in the original amount of
P600,000. Payments of P200,000 in principal plus
accrued interest are due annually on July 1, 2020,
2021 and 2022. In its June 30, 2021 statement of
financial position, what amount should Balentime
Company report as a current asset for interest on
the note receivable?
a. None
b. P16,000
c. P32,000
d. P48,000
2. On June 1, 2021, Erl Company loaned Peji Company
P500,000 on 12% note, payable in five annual
installments of P100,000 beginning January 2, 2022. In
connection with this loan, Peji was required to deposit
P5,000 in a non-interest bearing escrow account. The
amount held in escrow is to be returned to Peji after all
principal and interest payments have been made.
Interest on the note is payable in the first day of each
month beginning July 1, 2021. Peji made timely
payments up to November 1, 2021. On January 2, 2022,
Erl corporation received payment of the first principal
installment plus all interest due. How much is Erl’s
interest receivabe on the loan to Peji at December 31,
2021?
A. None b. P5,000
c. P10,000 d. P15,000
3. On January 2, 2021, Kaya Go Company sold equipment with
a carrying amount of P480,000 in exchange for a P600,000
non-interest bearing note due January 2, 2024. There was no
established exchange prince for the equipment. The prevailing
rate of interest for a note of this type at January 2, 2021 was
10%. The present value of 1 at 10% for three periods is
0.7513.
Question 1: How much should Kaya Go Company report as
interest income in its 2021 profit or loss statement?
a. 45,078
b. 49,586
c. 54,544
d. 60,000
Question 2: How much should Kaya Go Company report as
gain or loss on sale of equipment in its 2021 profit or loss
statement?
a. 29,220 loss b. 29,220 gain c. 120,000 gain d. 270,000 gain
Question 3: What is the carrying value of the note receivable
as of December 31, 2021 statement of financial position?
a. 450,780 b. 495,858
c. 545,444
d. 600,000
4. Sky Co. sold to Mavis Co. a P200,000, 8%, 5 year
note that required five equal annual year end
payments. This note was discounted to yield a 9%
rate to Mavis. The present value factors of an
ordinary of P1 for five periods are as follows:
8%
3.992
9%
3.890
What should be the total interest revenue earned
by Mavis on this note?
a. P50,500 b. P55,610 c. P80,000 d. P90,000
5. On March 1, 2021, Aki Company sold goods to Snow
Company. Snow signed a non-interest bearing note requiring
payment of P60,000 annually for seven years. The first
payment was made on March 31, 2021. The prevailing
interest for this type of note at the date of issuance was 10%.
Information on present value factors is as follows:
Periods PV of 1 at 10% PV of Ordinary Annuity of 1 at 10%
6
.56
4.36
7
.51
4.87
How much should Aki Company report as sales revenue in
March 2021?
a. 214,200
b. 261,600
c. 292,200
d. 321,600
6. On December 31, 2021, Primo Corporation sold for
P50,000 an old machine having an original cost of
P70,000 and a book value of P20,000, the term of the
sale were as follows:
10,000 downpayment
Balance of 20,000 payable equally for the next two
years every December 31
The agreement of sale made no mention of interest,
however, 9% would be a fair rate for this type of
transaction. What should be the amount of the notes
receivable, net of the unamortized discount and gain on
sale, respectively, on December 31, 2021?
a. 35,182 and 25,182
b. 40,000 and 20,000
c. 45,182 and 25,182
d. 70,364 and 30,000
7. Sky Company purchased from Mavis Corporation
a P400,000, 8%, five year note that requires five
annual year-end installments of P100,180. The note
was discounted to yield a 9% rate to Sky. At the date
of purchase, Sky recorded the note at its present
value of P389,700. What is the total unearned
interest revenue that will be realized over the term
of the financial instrument?
a. 100,900
b. 111,200
c. 160,000
d. 180,000
Loans
Receivable
Pointers
•A loan receivable is a financial asset resulting
from a loan granted by a bank or financial
institution to a borrower/client.
•The repayment period of the loan may be shortterm, but in most cases, it covers several years.
•At initial recognition, the loan receivable is
measured at fair value plus directly attributable
transaction costs.
•The fair value of the loan receivable at initial
recognition is typically the transaction price or
the loan amount.
Pointers
• Transaction costs that are directly attributable to the
loan receivable include direct origination costs.
• Direct origination costs are included in the initial
measurement of the loan receivable.
• Indirect origination costs are treated as an outright
expense and are not added to the fair value of the
loan receivable.
• PFRS 9, paragraph 4.1.2, states that if a financial
asset's business model is to collect contractual cash
flows on specified dates and the contractual cash
flows are solely payments of principal and interest,
the asset should be measured at amortized cost.
Pointers
• A loan receivable is measured at amortized cost
using the effective interest method.
• Amortized cost is calculated by subtracting
principal repayments and adding or subtracting
the cumulative amortization of any difference
between the initial amount recognized and the
principal maturity amount, minus reduction for
impairment or uncollectibility.
• If the initial amount recognized is lower than the
principal amount, the difference's amortization is
added to the carrying amount, and if it's higher,
the difference's amortization is deducted from
the carrying amount.
Pointers
• Origination fees are charged by banks to
borrowers for loan creation, including activities
like evaluating financial conditions, collateral and
security, negotiating terms, preparing
documents, and closing the loan transaction.
• Origination fees received from borrowers are
recognized as unearned interest income and
amortized over the loan term.
Pointers
• Direct origination costs are the fees that are not
chargeable against the borrower.
• Direct origination costs are deferred and also
amortized over the loan term.
• Direct origination costs are preferably offset
against any unearned origination fees received.
Pointers
• If origination fees received exceed direct
origination costs, the difference is unearned
interest income, and the amortization will
increase interest income.
• If direct origination costs exceed origination fees
received, the difference is charged to direct
origination costs, and the amortization will
decrease interest income.
• The origination fees received and the direct
origination costs are included in the
measurement of the loan receivable.
Review Questions
1. Piggy Bank granted a loan to a borrower on January 1, 2023. The
interest rate on the loan is 10% payable annually starting
December 31, 2023. The loan matures in 5 years on December
31, 2027. The data related to the loan are:
• Principal amount
P4,000,000
• Direct origination cost
61,500
• Origination fee received
350,000
The effective rate on the loan after considering the direct
origination cost and origination fee received is 12%.
Question 1: what is the carrying amount of the loan receivable on
January 1, 2023?
a. 4,000,000
b. 4,650,000
c. 4,411,500
d. 3,711,500
Question 2: what is the interest income for 2023?
a. 400,000
b. 558,000
c. 529,380
d. 445,380
2. Zylin granted an 8%, 3 year P6,000,000 loan to Amanda Company
on January 1, 2020. The interest on the loan is payable every
December 31. Zylin incurred P520,600 of direct origination cost but
an origination fee of P200,000 was charged against Amanda
Company. The effective rate on the loan as a result of the
origination fee and cost is now 6%.
Question 1: what is the carrying value of the loan on January 1,
2020 in Zylin’s accounting books?
a. 5,800,000
b. 6,000,000
c. 6,320,600
d. 6,520,600
Question 2: What is the carrying value of the loan on December 31,
2021 in Zylin’s accounting books?
a. 6,000,000
b. 6,113,026
c. 6,219,836
d. 6,320,600
3. Mam P G Bank loaned Earl Krus P5,000,000 on January 1, 2021. The
terms of the loan require principal payments of P1,000,000 each year
for 5 years plus 8% interest. The first principal and interest payment is
due on January 1, 2022. Earl made the required payments during 2022
and 2023. However, during 2023, Earl began to experience financial
difficulties, requiring PG Bank to reassess the collectability of the loan.
On December 31, 2023, PG Bank has determined that the remaining
principal payment will be collected but the collection of interest is
unlikely. PG bank did not accrue the interest on December 31, 2023.
The present value of 1 at 8% is as follows:
For one period
0.926
For two periods
0.857
For three periods
-.794
Question 1: what is the loan impairment loss on December 31, 2023?
a.
423,000
b. 217,000
c. 222,000
d. 0
3. Mam P G Bank loaned Earl Krus P5,000,000 on January 1, 2021. The
terms of the loan require principal payments of P1,000,000 each year
for 5 years plus 8% interest. The first principal and interest payment is
due on January 1, 2022. Earl made the required payments during 2022
and 2023. However, during 2023, Earl began to experience financial
difficulties, requiring PG Bank to reassess the collectability of the loan.
On December 31, 2023, PG Bank has determined that the remaining
principal payment will be collected but the collection of interest is
unlikely. PG bank did not accrue the interest on December 31, 2023.
The present value of 1 at 8% is as follows:
For one period
0.926
For two periods
0.857
For three periods
-.794
Question 2: what is the interest income to be reported in 2024?
a.
126,160
b. 142,640
c. 240,000
d. 0
3. Mam P G Bank loaned Earl Krus P5,000,000 on January 1, 2021. The
terms of the loan require principal payments of P1,000,000 each year
for 5 years plus 8% interest. The first principal and interest payment is
due on January 1, 2022. Earl made the required payments during 2022
and 2023. However, during 2023, Earl began to experience financial
difficulties, requiring PG Bank to reassess the collectability of the loan.
On December 31, 2023, PG Bank has determined that the remaining
principal payment will be collected but the collection of interest is
unlikely. PG bank did not accrue the interest on December 31, 2023.
The present value of 1 at 8% is as follows:
For one period
0.926
For two periods
0.857
For three periods
-.794
Question 3: what is the carrying amount of the loan receivable on
December 31, 2024?
a. 2,000,000
b. 1,925,640
c. 1,640,360
d. 1,783,000