Accounting for Notes and Loans Receivable Summary:

Notes receivable represents a formal promise to

pay a certain sum of money at a specific future Short-term Long-term
date.  It is supported by a promissory note, binding
the issuer legally to make good the settlement
thereof.  The term notes receivable represents only Recorded at present value
claims arising from sale of goods and services in Recorded at Face Value of cash expected to be
the ordinary course of business. Loans collected
receivable on the other hand arises from loan
granted by a bank or financial institutions to a Interest Rates Note issued at:
borrower.
Initial Measurement of Notes Receivable
Stated rate = market rate Face value
Notes receivable should be measured initially at
present value.  However, it will be primarily
dependent on whether the notes receivable Stated rate > market rate Premium
is interest bearing or non-interest bearing.
Stated rate < market rate Discount
1. Interest bearing note is measured initially at
face value, which is the present value on
the date of issuance.
2. Non-interest bearing notes receivable is Subsequent Measurement of Notes Receivable
measured at present value which is the
discounted value of the future cash flows Long term notes receivable are measured at
using the effective interest rate. amortized cost using the effective interest method.
This is in accordance with PFRS 9, par. 5.2.1. 
Amortized cost is the amount at which the note
Present value is the sum of all future cash flows
receivable is measured initially:
discounted using the prevailing market rate of
1. Minus principal repayment
interest for similar notes.
2. Plus or minus cumulative amortization of any
Short-term notes receivable is measured at face difference between the initial carrying amount and
value since the effect of discounting is immaterial. the principal maturing amount.
3. Minus reduction for impairment or uncollectibility.
Initial Measurement of Loans Receivable
 Illustration – Interest Bearing
Loans receivable is measured initially at fair value
plus transaction costs that are directly attributable An entity owned a tract of land costing P800,000
to the acquisition of the financial asset. and sold the land for P1,000,000.  the entity
received a 3-year note for P1,000,000 plus interest
Fair value is the transaction price or the amount of of 12% compounded annually.
loan granted.   Transaction costs also include direct
organization cost included in the initial FIRST YEAR:
measurement of the loan receivable.  Indirect
Notes receivable                    1,000,000
organization costs are recorded as outright
expense.        Land                                                  800,000
Compensated originating Fees:        Gain on sale of land                        200,000

1. Evaluating the borrower’s financial  

condition.
Accrued interest receivable   120,000
2. Evaluating guarantees, collateral and other
security.               Interest income                120,000
3. Negotiating the terms of the loan
4. Preparing and processing the documents  
related to the loan.
5. Closing and approving the loan transaction.
SECOND YEAR: Unearned interest income            20,000
Accrued interest receivable     134,400      Interest income                                 20,000
              Interest income                    134,400      (recognition of interest income)
 THIRD YEAR: Amortization of Interest Income
Cash                                         1,404,928
              Note receivable                          1,000,000
              Accrued interest receivable          254,400
              Interest income                    150,528
Illustration 2 – Non-interest Bearing Note (Valix)
 Illustration 1 – Non-Interest Bearing Notes
Receivable (Valix) On January 1, 2019, an entity sold an equipment
with a cost of P250,000 for P400,000.  The buyer
An entity manufactures and sells machinery.  On paid a down of P100,000 and signed a non-interest
January 1, 2019, the entity sold machinery costing bearing note for P300,000 payable in equal annual
P280,000 for P400,000.  The buyer signed a installment of P100,000 every December 31.  The
noninterest bearing note for P400,000 payable in prevailing interest rate for a note of this type is
four equal installments every December 31.  The 10%.  The present value of an ordinary annuity of 1
cash price for the machinery is P350,000.   for 3 periods at 10% is 2.4869.  The present value
of the note is computed by multiplying the annual
  installment of P100,000 by the present value factor
Face value of the note                   P400,000 of 2.4869 or P248,690.

PV = cash price                                350,000 Face value of the note                  P 300,000

Unearned interest income             P   50,000 PV = 100,000x2.4869                     248,690

  Unearned interest income             P   51,310

Cash sales price                               350,000  

Cost of machinery                             280,000 PV of the note                                   248,690

Gross income                                      70,000 Cash received-down payment          100,000

Sales price                                    348,690
Journal entries for 2019:
Cost of equipment                             250,000
 
Gain on sale of equipment                  98,690
Notes receivable                400,000
 
     Sales                                           350,000
Entries:
     Unearned interest income             50,000
To record the sale:
 
Cash                               100,000
Cash                                 100,000
Notes Receivable            300,000
     Notes receivable                         100,000
     Equipment                                 250,000
     (collection)
     Gain on sale of equipment          98,690
 
     Unearned interest income           51,310
 
Journal entries- 2019
To record first installment:
Jan 1 Cash                       100,000
Cash                          100,000
          Notes receivable                  400,000
    Notes receivable                      100,000
          Accumulated depreciation   250,000
 
              Equipment                                      600,000
To record interest income for 2019:
               Gain on sale of equipment          50,520
Unearned interest income       24,869
               Unearned interest income            99,480
     Interest income                       24,869
 Dec 31 Unearned interest income   30,052
Amortization Table:
                Interest income                30,052
 
Dec 31, 2020:

  Unearned interest income                33,057

Illustration 3 – Non-Interest Bearing Note
                Interest income                   33,057
On January 1, 2019, an entity sold an equipment
costing P600,000 with accumulated depreciation of Dec 31, 2021:
P250,000.  The entity received as consideration Unearned interest income             36,371
P100,000 cash and a P400,000 non-interest
bearing note due on January 1, 2022.  The                 Interest income                    36,371
prevailing rate of interest for a note of this type is
10%.  The present value of 1 at 10% for 3 years is Jan 1, 2022:
0.7513.
Cash                                               400,000
Note:  no installment payments made.
       Notes receivable                   400,000
Face of note                                     400,000
 
Present value (400k x .7513)           300,520
Illustration – Loans Receivable (Valix)
Unearned interest income                 99,480
Global Bank granted a loan to a borrower on Jan 1,
  2019.  The interest on the loan is 12% payable
annually starting Dec 31, 2019.  The loan matures
Present value of note                      300,520 in three years on Dec 31, 2021. The principal
amount of the loan is P5,000,000.  Origination fees
Cash received                                100,000 received from borrower is P331,800 and direct
Sales price                                      400,520 origination costs incurred, P100,000. 

Carrying amount (600k-250k)         350,000

Gain on sale of equipment                50,520

Journal entries:
To record the loan:

Loan receivable                   5,000,000
Cash                                           5,000,000
 
To record the origination fees received from the          
borrower: Unearned interest income          77,005
Interest income    77,005
 Cash                          331,800
December 31, 2021   
     Unearned interest income           331,800 Cash                               600,000
  Interest income      600,000

To record the direct origination costs incurred by Unearned interest income        87,247

the bank: Interest income                             87,247

Unearned interest income          100,000 Cash                                         5,000,000

Cash      100,000 Loans receivable                  5,000,000

Note:  
Impairment of Loans
 Unearned interest income has a credit PFRS 9, par 5.5.1, provides that an entity shall
balance of P231,800 to be amortized recognize a loss allowance for expected credit
over the term of the loan using effective losses on financial asset measured at amortized
interest method. cost. Par 5.5.3… an entity shall measure the loss
 A new effective interest rate must be allowance for a financial instrument at an amount
computed. equal to the lifetime expected credit losses if the
 The carrying amount of the loan credit risk on that financial instrument has
receivable is P4,768,200, lower than the increased significantly since initial
principal amount. This means there is a recognition.  Credit losses are the present value of
discount.  So the effective rate must be all cash shortfalls.
higher than 12%.
 Compute the effective interest rate  Measurement of Impairment
using trial and error. In this problem, it
was computed to be 14%. To be considered are:

Amortization Table – Effective Interest Method 1. The probability-weighted outcome

2. The time value of money
3. Reasonable and supportable
information that is available without
undue cost or effort.

The amount of impairment loss can be measured

Interest received = principal x nominal rate as the difference between the carrying amount and
Interest income   = carrying amount x effective rate the present value of estimated future cash flows
discounted at the original effective rate. 
 
Illustration 1 (Valix)
Journal entries:
International Bank loaned P5,000,00 to Bankard
December 31, 2019   Company on January 1, 2017.   The terms of the
Cash          600,000 loan require principal payment of P1,000,000 each
Interest income     600,000 year for 5 years plus interest at 10%.  The first
principal and interest payment is due on December
Unearned interest income   67,548 31, 2017. Bankard Company made the required
Interest income      67,548 payments on December 31, 2017 and December
31, 2018.   However during 2019, Bankard
December 31, 2020    Company began to experience financial difficulties
Cash               600,000 and was unable to make the required principal and
Interest income     600,000 interest payment on December 31, 2019.  
                                     
On December 31, 2019, International Bank
assessed the collectability of the loan and has Allowance for loan impairment     240,790
determined that the remaining principal payments
will be collected but the collection of the interest is               Interest income                     240,790
unlikely.               To record interest income using effective
interest of 10%.
The loan receivable has carrying amount of
Carrying amount P3,000,000 – 592,100 =
P3,300,000 including the accrued interest of P2,407,900
P300,000 on December 31, 2019.  International Interest income: P2,407,900 x 10% =
Bank projected the cash flows from the loan on 240,790
December 31, 2019:
 Journal entry on December 31, 2021:

 Cash                                   1,000,000
Loans receivable             1,000,000
To record cash collection.

 Allowance for loan impairment       214,869

Interest income                    214,869
To record interest income using effective
interest of 10%.
 2019 carrying amount = 3,000,000-500,000 –
( 592,100 – 240,790) = 2,148,690
Interest income: P2,148,690 x 10% =
P214,869             

Journal entry on December 31, 2022:

Cash                                   1,500,000
Impairment loss: Loans receivable              1,500,000
To record final cash collection.
Carrying amount of loan             3,300,000
 
Present value of cash flows       2,407,900
Allowance for loan impairment       136,441
Impairment loss                            892,100
              Interest income                136,441
 
Journal entry on December 31, 2019:               To record interest income using effective
interest of 10%.
Loan impairment loss                 892,100
               2019 carrying amount = 3,000,000-
              Accrued interest receivable        300,000 500,000 –500,000- ( 592,100 – 240,790-214,869) =
1,363,559
              Allowance for loan impairment   592,100
               Interest income: P1,363,559x 10% =
  P136,441
Journal entry on December 31, 2020:  
Cash                                           500,000 Illustration 2 (Valix)
Loans receivable                    500,000
To record cash collection. Urbank Bank granted a loan of P3,000,000 to a
borrower on January 1, 2019.  The terms of the loan
  were payment in full on December 31, 2024 plus
annual interest payment at 8% every December 31. 
The first interest payment was made on December
31, 2019.

On December 31, 2019, due to financial difficulties,

the borrower informed the bank that it is probably
would miss the interest payments for the next two
years. After that, the borrow expects to resume the
annual interest payment but the principal would be
paid on December 31, 2025 nor one year late with
interest paid for that additional year.

Schedule of payments:

Carrying amount of the loan on December 31,

2019               3,000,000

Present value of loan                 2,571,600

Impairment loss                               428,400