Notes Receivable

A note receivable is a written promise of another party to pay cash.

Generally, notes receivable are classified as financial assets at amortized cost.

Financial assets at amortized cost are initially measured at their fair value. For notes receivable, its fair value may
be calculated as the present value of its cash flows discounted using the market rate of interest (e ective interest
rate).

However, for short-term notes receivable, the e ect of the discounting of notes is usually immaterial.

The accounting for notes receivable is summarized below:

Accounting for notes receivable

Initial measurement Subsequent Interest
measurement income
Short-term notes receivable Face amount Face amount Nominal
interest rate
Realistic Face amount Face amount Nominal
Interest interest rates interest rate
bearing Unrealistic Present value of Amortized cost E ective
Long-term
interest rates principal and interest interest rate
notes
1. Cash price Amortized cost E ective
receivable
equivalent interest rate
Non-interest bearing
2. Present value of
principal

Time value of money

The time value of money is the concept that money in the future is worth less than money today.

To compute the present value of cash flows from notes receivable, the concept of the time value of money is
applied. The present value of cash flow is computed as follows:

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑥 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑓𝑎𝑐𝑡𝑜𝑟

Present value factor formula

Present value of 1

The present value factor used for one-time payment is the present value of 1. The formula is as follows:

𝑃𝑉 𝑜𝑓 1 = (1 + 𝑟)

Where:
r = e ective interest rate
n = period
Computation of the present value of 1 using a basic calculator is as follows:

1. 1+r
2. Press ÷ 2x
3. Press = n times

Present value of ordinary annuity of 1

The present value factor used for a series of equal payments where the first payment is payable at the end of the
first period is the present value of an ordinary annuity of 1. The formula is as follows:

1 − (1 + 𝑟)
𝑃𝑉 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑜𝑓 1 =
𝑟
Computation of the present value of an ordinary annuity of 1 using a basic calculator is as follows:

1. 1+r
2. Press ÷ 2x
3. Press = n times
4. Minus 1
5. ÷r
6. Press +/- (Remove negative)

Present value of annuity due of 1

The present value factor used for a series of equal payments where the first payment is payable at the beginning
of the first period is the present value of an annuity due of 1. The formula is as follows:

1 − (1 + 𝑟)
𝑃𝑉 𝑜𝑓 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 𝑜𝑓 1 = 𝑥 (1 + 𝑟)
𝑟

1. 1+r
2. Press ÷ 2x
3. Press = n times
4. Minus 1
5. ÷r
6. x 1.r
7. Press +/- (Remove negative)
Illustration 1 (Interest-bearing; One-time payment of principal; Realistic rates):

On October 1, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for a
P3,000,000 note bearing 12% interest. The note matures on October 1, 2028, with interest payable annually every
October 1.

Required: Prepare journal entries for 2025, 2026, 2027 and 2028.

Suggested solution:

Oct 1, 2025 Note receivable 3,000,000

Land 2,000,000
Gain from sale of land 1,000,000

Dec 31, 2025 Interest receivable (3M x 12% x 3/12) 90,000

Interest income 90,000

Oct 1, 2026 Cash (3M x 12%) 360,000

Interest receivable 90,000
Interest income (3M x 12% x 9/12) 270,000

Dec 31, 2026 Interest receivable (3M x 12% x 3/12) 90,000

Interest income 90,000

Oct 1, 2027 Cash (3M x 12%) 360,000

Interest receivable 90,000
Interest income (3M x 12% x 9/12) 270,000

Dec 31, 2027 Interest receivable (3M x 12% x 3/12) 90,000

Interest income 90,000

Oct 1, 2028 Cash (3M x 12%) 360,000

Interest receivable 90,000
Interest income (3M x 12% x 9/12) 270,000

Cash 3,000,000
Note receivable 3,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (noncurrent) 3,000,000
Accrued interest receivable (current) 90,000
Interest income 90,000
Dec 31, 2026 Note receivable (noncurrent) 3,000,000
Accrued interest receivable (current) 90,000
Interest income 360,000
Dec 31, 2027 Note receivable (current) 3,000,000
Accrued interest receivable (current) 90,000
Interest income 360,000
Dec 31, 2028 Note receivable (none) –
Accrued interest receivable (none) –
Interest income 270,000
Illustration 2 (Interest-bearing; Installment payment of principal; Realistic rates):

On October 1, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for a
three-year, P3,000,000 note bearing 12% interest. The note is repayable in three equal annual installments, with
the first payment due on October 1, 2026. Interest is payable annually every October 1.

Required: Prepare journal entries for 2025, 2026, 2027 and 2028.

Suggested solution:

Oct 1, 2025 Note receivable 3,000,000

Land 2,000,000
Gain from sale of land 1,000,000

Dec 31, 2025 Interest receivable (3M x 12% x 3/12) 90,000

Interest income 90,000

Oct 1, 2026 Cash (3M x 12%) 360,000

Interest receivable 90,000
Interest income (3M x 12% x 9/12) 270,000

Cash (3M/3) 1,000,000

Note receivable 1,000,000

Dec 31, 2026 Interest receivable (2M x 12% x 3/12) 60,000

Interest income 60,000

Oct 1, 2027 Cash (2M x 12%) 240,000

Interest receivable 60,000
Interest income (2M x 12% x 9/12) 180,000

Cash (3M/3) 1,000,000

Note receivable 1,000,000

Dec 31, 2027 Interest receivable (1M x 12% x 3/12) 30,000

Interest income 30,000

Oct 1, 2028 Cash (1M x 12%) 120,000

Interest receivable 30,000
Interest income (1M x 12% x 9/12) 90,000

Cash (3M/3) 1,000,000

Note receivable 1,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (current) 1,000,000
Note receivable (noncurrent) 2,000,000
Accrued interest receivable (current) 90,000
Interest income 90,000
Dec 31, 2026 Note receivable (current) 1,000,000
Note receivable (noncurrent) 1,000,000
Accrued interest receivable (current) 60,000
Interest income 330,000
Dec 31, 2027 Note receivable (current) 1,000,000
Accrued interest receivable (current) 60,000
Interest income 210,000
Dec 31, 2028 Note receivable (none) –
Accrued interest receivable (none) –
Interest income 90,000

Illustration 3 (Interest bearing; Lump-sum payment of principal; Unrealistic rates):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 note bearing 3% interest. The note matures on December 31, 2028, with interest payable annually
every December 31.

The market rate of interest for a similar type of note is 12%.

Required: Prepare journal entries for 2025, 2026, 2027 and 2028.

Suggested solution:

Present value of principal (3M x 0.7118) 2,135,400

Present value of interest (90K x 2.4018) 216,162
CA of note receivable – Dec 31, 2025 2,351,562

Interest income Interest received Amortization Carrying amount

Dec 31, 2025 2,351,562
Dec 31, 2026 282,187 90,000 192,187 2,543,749
Dec 31, 2027 305,250 90,000 215,250 2,758,999
Dec 31, 2028 331,001 90,000 241,001 3,000,000

Dec 31, 2025 Note receivable 3,000,000

Unearned interest income 648,438
Land 2,000,000
Gain from sale of land 351,562

Dec 31, 2026 Cash 90,000

Unearned interest income 192,187
Interest income 282,187

Dec 31, 2027 Cash 90,000

Unearned interest income 215,250
Interest income 305,250
 Dec 31, 2028 Cash 90,000
Unearned interest income 241,001
Interest income 331,001

Cash 3,000,000
Note receivable 3,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (noncurrent) 2,351,562
Interest income –
Dec 31, 2026 Note receivable (noncurrent) 2,543,749
Interest income 282,187
Dec 31, 2027 Note receivable (current) 2,758,999
Interest income 305,250
Dec 31, 2028 Note receivable (none) –
Interest income 331,001

Illustration 3 (Interest bearing; Installment payment of principal; Unrealistic rates):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 note bearing 3% interest. The note is repayable in three equal annual installments, with the first
payment due on December 31, 2026. Interest is payable annually every December 31.

The market rate of interest for a similar type of note is 12%.

Required: Prepare journal entries for 2025, 2026, 2027 and 2028.

Principal Interest received Total cash flow Present value Present value
factor
Dec 31, 2026 1,000,000 90,000 1,090,000 0.8929 973,261
Dec 31, 2027 1,000,000 60,000 1,060,000 0.7972 845,032
Dec 31, 2028 1,000,000 30,000 1,030,000 0.7118 733,154
CA of note receivable 2,551,447

Principal Interest income Interest received Amortization Carrying amount

Dec 31, 2025 2,551,447
Dec 31, 2026 1,000,000 306,174 90,000 216,174 1,767,621
Dec 31, 2027 1,000,000 212,115 60,000 152,115 919,736
Dec 31, 2028 1,000,000 110,264 30,000 80,264 –

Dec 31, 2025 Note receivable 3,000,000

Unearned interest income 448,553
Land 2,000,000
Gain from sale of land 551,447

Dec 31, 2026 Cash 90,000

Unearned interest income 216,174
Interest income 306,174

Cash 1,000,000
Note receivable 1,000,000
 Dec 31, 2027 Cash 60,000
Unearned interest income 152,115
Interest income 212,115

Cash 1,000,000
Note receivable 1,000,000

Dec 31, 2028 Cash 30,000

Unearned interest income 80,264
Interest income 110,264

Cash 1,000,000
Note receivable 1,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (current) 783,826
Note receivable (noncurrent) 1,767,621
Interest income –
Dec 31, 2026 Note receivable (current) 847,885
Note receivable (noncurrent) 919,736
Interest income 306,174
Dec 31, 2027 Note receivable (current) 919,736
Note receivable (noncurrent) –
Interest income 212,115
Dec 31, 2028 Note receivable (none) –
Interest income 110,264

Illustration 4 (Noninterest bearing; Lump-sum payment; With cash price equivalent):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 noninterest bearing note. The note matures on December 31, 2028. The cash price equivalent of the
land is P2,135,400. The e ective interest rate of the note is 12%.

Required: Prepare journal entries for 2025, 2026, 2027 and 2028.

Date Interest income Carrying amount

Dec 31, 2025 2,135,400
Dec 31, 2026 256,248 2,391,648
Dec 31, 2027 286,998 2,678,646
Dec 31, 2028 321,354 3,000,000

Dec 31, 2025 Note receivable 3,000,000

Unearned interest income 864,600
Land 2,000,000
Gain from sale of land 135,400

Dec 31, 2026 Unearned interest income 256,248

Interest income 256,248

Dec 31, 2027 Unearned interest income 286,998

Interest income 286,998
 Dec 31, 2028 Unearned interest income 321,354
Interest income 321,354

Cash 3,000,000
Note receivable 3,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (noncurrent) 2,135,400
Interest income –
Dec 31, 2026 Note receivable (noncurrent) 2,391,648
Interest income 256,248
Dec 31, 2027 Note receivable (current) 2,678,646
Interest income 286,998
Dec 31, 2028 Note receivable (none) –
Interest income 321,354

Illustration 5 (Noninterest bearing; Lump-sum payment; No cash price equivalent):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 noninterest bearing note. The note matures on December 31, 2028. The land has no establish cash
price equivalent. The e ective interest rate of the note is 11%.

Principal 3,000,000
Multiply by PV of 1 at 11% for 3 periods 0.7312
CA of note receivable – December 31, 2025 2,193,600

Date Interest income Carrying amount

Dec 31, 2025 2,193,600
Dec 31, 2026 241,296 2,434,896
Dec 31, 2027 267,839 2,702,735
Dec 31, 2028 297,265 3,000,000

Dec 31, 2025 Note receivable 3,000,000

Unearned interest income 806,400
Land 2,000,000
Gain from sale of land 193,600

Dec 31, 2026 Unearned interest income 241,296

Interest income 241,296

Dec 31, 2027 Unearned interest income 267,839

Interest income 267,839

Dec 31, 2028 Unearned interest income 297,265

Interest income 297,265

Cash 3,000,000
Note receivable 3,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (noncurrent) 2,193,600
Interest income –
Dec 31, 2026 Note receivable (noncurrent) 2,434,896
Interest income 241,296
Dec 31, 2027 Note receivable (current) 2,702,735
Interest income 267,839
Dec 31, 2028 Note receivable (none) –
Interest income 297,265

Illustration 6 (Noninterest bearing; Installment payment; No cash price equivalent; First payment payable at the
end of the first period):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 noninterest bearing note. The note is payable in 3 equal annual installments every December 31,
starting December 31, 2026. The land has no establish cash price equivalent. The market rate of interest for similar
type of note is 10%.

Installment payment 1,000,000

Multiply by PV of OA of 1 at 10% for 3 periods 2.4869
CA of note receivable – Dec 31, 2025 2,486,900

Principal Interest income Carrying amount

Dec 31, 2025 2,486,900
Dec 31, 2026 1,000,000 248,690 1,735,590
Dec 31, 2027 1,000,000 173,559 909,149
Dec 31, 2028 1,000,000 90,851 –

Dec 31, 2025 Note receivable 3,000,000

Unearned interest income 513,100
Land 2,000,000
Gain from sale of land 486,900

Dec 31, 2026 Unearned interest income 248,690

Interest income 248,690

Cash 1,000,000
Note receivable 1,000,000

Dec 31, 2027 Unearned interest income 173,559

Interest income 173,559

Cash 1,000,000
Note receivable 1,000,000

Dec 31, 2028 Unearned interest income 90,851

Interest income 90,851

Cash 1,000,000
Note receivable 1,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (current) 751,310
Note receivable (noncurrent) 1,735,590
Interest income –
Dec 31, 2026 Note receivable (current) 826,441
Note receivable (noncurrent) 909,149
Interest income 248,690
Dec 31, 2027 Note receivable (current) 909,149
Note receivable (noncurrent) –
Interest income 173,559
Dec 31, 2028 Note receivable (none) –
Interest income 90,851

Illustration 7 (Noninterest bearing; Installment payment; No cash price equivalent; First payment payable at the
beginning of the first period):

On December 31, 2025, Alpha Company sold a tract of land with a carrying amount of P2,000,000 in exchange for
a P3,000,000 noninterest bearing note. The note is payable in 3 equal annual installments every December 31,
starting December 31, 2025. The land has no establish cash price equivalent. The market rate of interest for similar
type of note is 9%.

Installment payment 1,000,000

Multiply by PV of OA of 1 at 9% for 2 periods 1.7591
CA of note receivable – Dec 31, 2025 1,759,100

Principal Interest income Carrying amount

Dec 31, 2025 1,759,100
Dec 31, 2026 1,000,000 158,319 917,419
Dec 31, 2027 1,000,000 82,581 –

Dec 31, 2025 Cash 1,000,000

Note receivable 2,000,000
Unearned interest income 240,900
Land 2,000,000
Gain from sale of land 759,100

Dec 31, 2026 Unearned interest income 158,319

Interest income 158,319

Cash 1,000,000
Note receivable 1,000,000

Dec 31, 2027 Unearned interest income 82,581

Interest income 82,581

Cash 1,000,000
Note receivable 1,000,000
The following should be reported in the statement of financial position and statement of comprehensive income:

SFP SCI
Dec 31, 2025 Note receivable (current) 841,681
Note receivable (noncurrent) 917,419
Interest income –
Dec 31, 2026 Note receivable (current) 917,419
Note receivable (noncurrent) –
Interest income 158,319
Dec 31, 2027 Note receivable (none) –
Interest income 82,581