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Note Receivable

A note receivable is a formal promise to pay supported by a promissory note. Notes receivable are initially measured at present value for long-term notes and at face value for short-term notes. Subsequently, short-term notes stay at face value while long-term notes are measured at amortized cost using the effective interest method. A dishonored note is a mature but unpaid note that is removed from notes receivable and transferred to accounts receivable along with any interest or charges.

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106 views2 pages

Note Receivable

A note receivable is a formal promise to pay supported by a promissory note. Notes receivable are initially measured at present value for long-term notes and at face value for short-term notes. Subsequently, short-term notes stay at face value while long-term notes are measured at amortized cost using the effective interest method. A dishonored note is a mature but unpaid note that is removed from notes receivable and transferred to accounts receivable along with any interest or charges.

Uploaded by

Irene Odato
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Note Receivable

What is a Note Receivable?


A note receivable is a claim supported by a formal promise to pay in the form of a
promissory note.

Negotiable promissory notes- is an unconditional promissory note writing made by the one person to
another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a
sum certain money to order or to bearer.

How are Notes Receivable Measured?

INITIAL MEASUREMENT

IN GENERAL SHORT-TERM LONG-TERM NOTES LONG-TERM NOTES


(Conceptually) NOTES (INTEREST- (NON-INTEREST
BEARING) BEARING)
NR should be At FACE VALUE At FACE VALUE At PRESENT
measured initially at upon issuance. VALUE (PV)
PRESENT VALUE
(PV) Interest-bearing since it Actually, all notes
is explicitly stated in implicitly cointain
Sum of all future the contract the % of interest.
cashflows discounted interest.
using the effective It was called non-
interest rate interest simply because
(prevailing market interest is being
rate). included the face
amount rather than
stated separately
(unlike interest
bearing).

SUBSEQUENT MEASUREMENT

SHORT-TERM NOTES LONG-TERM NOTES LONG-TERM NOTES


(INTEREST-BEARING) (NONINTEREST-BEARING)
At FACE VALUE At AMORTIZED COST using At AMORTIZED COST
the effective interest. using effective interest method.

AC = PV + Amortization
of Discount
OR
AC = FV – Unamortized
Unearned Interest Income

TIME VALUE OF MONEY

Time value of money factor Application


 Present value of 1  Future cash flow in lump sum.
 Present value of an ordinary annuity of 1  Future cash flows are in installments; first
installment is not made immediately.
 Present value of annuity due of 1  Future cash flows are in installments; first
installment is made immediately or in
advance.
ILLUSTRATION: Simple Interest

On April 1, 20x1, ABC Co. Received a 1,500,000, 10%, 3-year note receivable in exchange for land
with carrying amount of 850,000. Pricipal, in three equal installments, plus interest are due annually
starting April 1, 20x2. Current market rates as of April 1, 20x1, December 31, 20x1, and December 31,
20x2 are 10%, 12% and 13%, respectively.

JOURNAL ENTRY

April Notes receivable 1,500,000


1, Land 850,000
20x Gain on sale 650,000
1 To record the sale of land
Dec. Interest receivaable (1.5M*9/12) 122,500
31, Interest income 122,500
20x1 To record the accrued interest for
20x1
April Cash (principal plus interest) 650,000
1, Note receivable (1.5M/3) 500,000
20x2 Interest receivable 37,500
(1.5M*10%*3/12) 122,500
To record the receipt of 1st
installment on note receivable
Dec. Interest receivable [(1.5M-5M)*9/12)] 75,000
31, Interest income 75,000
20x2 To record the accrued interest for
20x2
April Cash (principal plus interest) 600,000
1, Note receivable 500,000
20x3 Interest income (1M*10%*3/12) 25,000
Interest receivable 75,000
To record the receipt of 2 nd
installment on note receivable
Dec. Interest receiveble [(1.5M- 37,500
31, 5M)*10%*9/12]
20x3 Interest income 37,500
To record the accrued interest for
20x3
April Cash (principal plus interest) 550,000
1, Note receivable 500,000
20x4 Interest income (5M*10%*3/12) 12,500
Interest receivable 37,500
To record the receipt of last
installmeton note receivable

What is a Dishonored Note?

A dishonored note is a matured and unpaid note.

How do you treat a Dishonored Note?

Dishonored noted shall be removed from the notes receivable account and transferred to
accounts receivable at an amount to include, if any interest and other charges.

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