Accountancy Review Center (ARC)

of the Philippines Inc.

One Dream, One Team

FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO

FAR 206 – Long-term Receivables October 2021 CPALE REVIEW

LEARNING OBJECTIVES:
1. Gain or loss on from sale in which promissory note was the consideration received
2. Sales revenue in which promissory note was the consideration received
3. Initial measurement of notes receivable
4. Subsequent measurement of notes receivable
5. Interest income
6. Interest receivable
7. Current and noncurrent classification of notes receivable

REVIEW NOTES:
Notes Receivable – are claims supported by formal promises to pay usually in the form of notes. It is a written
contract in which one person promises to pay another person a definite sum of money.

Notes Receivable VS. Loans Receivable VS. Bonds Receivable:

Area of Notes Loans Bonds

Comparison Receivable Receivable Receivable

Holder of the Non-bank Bank or financial Investors (company with

receivable Non-financial institution institution excess funds)

Written document Promissory note Promissory note Bond indenture

Lending of cash to
Usual reason of Sale of goods, services, Lending of cash for
debtors in ordinary
issuance or PPE passive income
course of business

Short Term Notes Receivable:

Conceptually, notes receivable shall be measured initially at present value of future cash receipts and
subsequently measured at present value of remaining future cash receipts. However, short-term notes
receivable is practically measured at face value since the effect of discounting is usually not material.

Accounting for Notes Receivable:

• Initially, notes receivable are measured at fair value since no transaction cost are being paid when notes
are being issued. Fair value of the note is equal to the present value of future cash receipts.
• Subsequently, notes are measured at amortized cost using the effective interest method. The
amortized cost is also equal to the present value of remaining future cash receipts at year-end.
• Interest income is equal to the effective interest which is computed by multiplying the effective interest
rate to the carrying amount of the notes at the beginning of the period.
• Interest receivable is equal to the nominal interest of the note for the unpaid portion of the year. This
is computed by multiplying the face amount to the nominal interest rate less any payments during the
period.
• Non-current portion of the notes receivable, is equal to the present value of principal and nominal
interest payment beyond one year from the reporting date.
• Current portion of the notes receivable, is equal to the present value of principal and nominal interest
payment within year from the reporting date.

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Gain or Loss from Sale of Asset or Services:
Notes are usually received from sale of PPE, inventories or services. When notes are received in exchange for
PPE that was sold, gain or loss from sale maybe asked:

Fair value of NR P XX
Down payment XX
Total FV of consideration received P XX
Carrying amount of PPE sold ( XX)
Gain or (loss) from sale P XX

If what was sold are inventory or service, the sales or revenue is measured at total fair value of consideration
received.

Fair Value of the Note:

There are two methods to determine the fair value of the note:

(a) From the fair value of consideration received:

Fair value of PPE, Inventory, Service sold P XX

Down payment ( XX)
Fair value of the notes received P XX

(b) Present value of future cash receipt:

PV of principal P XX
PV of nominal interest (if any) XX
Fair value of the notes received P XX

Three Types of Notes:

The accounting for the notes receivable will depend on the type of notes received. The following are the different
types of note:

Nominal Interest (NI)

Effective Interest (EI)
1. Interest Bearing NI = ER

2. Noninterest Bearing NI = Zero

3. Interest-Bearing with Unrealistic Nominal Interest NI ≠ ER

Effective Interest Rate:

As a general rule, the nominal interest is equal to the effective interest. Exception to the rule:
§ The note is noninterest-bearing.
§ Fair value of consideration given up is not equal to the face amount of the note.

In the above exception, the effective interest rate should be computed if not given in the problem using trial and
error and interpolation if necessary.

Interest-Bearing Notes:
(a) Initial measurement (FV) – face amount
(b) Subsequent measurement (AC) – remaining face amount
(c) Interest income (EI) – face amount * nominal interest rate
(d) Interest receivable – face amount * nominal interest rate
(e) Non-current portion – face amount payable beyond 1 year
(f) Current portion – face amount payable within 1 year

Noninterest-Bearing Notes:
(a) Initial measurement (FV) – PV of principal

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(b) Subsequent measurement:

Initial measurement (initial CA) P XX

Times: 1 + Effective interest rate x%
Less: Principal payment (if serial) ( XX)
Carrying amount, end (AC) P XX

(c) Interest income:

Carrying amount, beg P XX

Times: Effective interest rate x%
Interest income P XX

(d) Interest receivable – zero

(e) Non-current portion:

Term note: Whole carrying amount if payable beyond one year. None if payable within one year.

Serial note:

Carrying amount, end P XX

Times: 1 + Effective interest rate x%
Less: Principal payment ( XX)
Noncurrent portion of NR P XX

(f) Current portion

Term note: Whole carrying amount if payable within one year. None if payable beyond one year.

Serial note:

Carrying amount, end P XX

Less: Noncurrent portion ( XX)
Current portion (residual) P XX

Interest-Bearing with Unrealistic NR:

(a) Initial measurement (FV):

PV of principal P XX
Add: PV of nominal interest XX
Initial measurement P XX

(b) Subsequent measurement:

Initial measurement (initial CA) P XX

Times: 1 + Effective interest rate x%
Less: Nominal interest ( XX)
Less: Principal payment (if serial) ( XX)
Carrying amount, end (AC) P XX

(c) Interest income:

Carrying amount, beg P XX

Times: Effective interest rate x%
Interest income P XX

(d) Interest receivable – face amount * nominal interest rate

(e) Non-current portion:

Term note: Whole carrying amount if payable beyond one year. None if payable within one year.

Serial note:

Carrying amount, end P XX

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 Times: 1 + Effective interest rate x%
Less: Nominal interest ( XX)
Less: Principal payment ( XX)
Noncurrent portion of NR P XX

(f) Current portion

Term note: Whole carrying amount if payable within one year. None if payable beyond one year.

Serial note:

Carrying amount, end P XX

Less: Noncurrent portion ( XX)
Current portion (residual) P XX

Interest Receivable:
The interest receivable is equal to the nominal interest less any payments made. Stated otherwise, it is equal to
the nominal interest pro-rated by the number of months unpaid. The number of months unpaid is from the last
interest payment date up to December 31 (or reporting period).

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DISCUSSION:

1. Short-term noninterest-bearing note receivable are usually recorded at their:

a. Present value
b. Net realizable value
c. Discounted value
d. Maturity value

2. Assuming that the ideal measure of short-term receivable in the balance sheet is the discounted value of
the cash to be received in the future, failure to follow this practice usually does not make the balance sheet
misleading because
a. The amount of discount is not material
b. Most receivables can be sold to a bank or factor
c. Most short-term receivables are not interest-bearing
d. The allowance for uncollectible accounts includes a discount element

3. Statement 1: Interest bearing long-term receivable shall be stated at face value.

Statement 2: Noninterest-bearing long-term receivables shall be stated at present value.
Statement 3: Short-term receivable, interest bearing or not, are generally stated at face value.
a. All statements are true
b. Only statement 1 is true
c. Only statement 2 is false
d. Only statement 3 is false

4. Which of the following notes receivable shall be reported at face value?

a. Long term non-interest bearing notes receivable
b. Long term interest bearing notes receivable with stated rate higher than effect rate
c. Long term interest bearing notes receivables with stated rate lower than effect rate
d. Long term interest bearing notes receivables with stated rate equals effective rate

5. A noninterest-bearing note received in exchange for property goods or service is recorded at

a. Fair market value of property goods or service or note whichever is more reliably determined.
b. Maturity value of the note.
c. Face value of the note.
d. Carrying amount of the property.

Numbers 6-10
On January 1, 2021, Mulawin Company sold equipment with a carrying amount of P4,800,000 in exchange for
P6,000,000 noninterest-bearing note due January 1, 2024. There was no established exchange price for the
equipment.

The prevailing interest rate for this note was 10%. The present value of 1 at 10% for three periods is 0.75.

6. What is the carrying amount of the note receivable on January 1, 2021?

a. 4,950,000 c. 6,000,000
b. 4,500,000 d. 4,800,000

7. What amount should be reported as gain or loss on sale of equipment in 2021?

a. 1,200,000 gain c. 300,000 gain
b. 2,700,000 gain d. 300,000 loss

8. What is the carrying amount of the note on December 31, 2021?

a. 4,950,000 c. 6,000,000
b. 4,500,000 d. 4,800,000

9. What amount should be reported as interest income for 2021?

a. 600,000 c. 528,000
b. 500,000 d. 450,000

10. What amount should be reported as interest income for 2022?

a. 480,000 c. 528,000
b. 495,000 d. 500,000

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Numbers 11-15
On January 1, 2021 Nonstop Company sold a building for P5,000,000 to Icecream Company. Icecream
Company paid P500,000 down and signed a noninterest bearing note for the balance which is payable in three
equal annual installments every December 31 of each year.

The carrying amount of the building is P4,200,000. Assume prevailing interest rate for a note of this type is
12%.

Present value of 1 at 12% for 3 periods 2.4018

Present value annuity at 12% for 3 periods 0.7118

11. How much is the gain or loss on sale of building?

a. 597,300 c. 800,000
b. 97,300 d. 300,000

12. How much is the interest income for the year 2021?
a. 600,000 c. 432,324
b. 492,324 d. 540,000

13. The carrying amount of notes on December 31, 2021 is

a. 3,000,000 c. 2,535,024
b. 3,602,700 d. 4,035,024

14. The current portion of notes on December 31, 2021 is

a. 1,500,000 c. 1,195,797
b. 1,067,676 d. 1,339,227

15. The non-current portion of notes on December 31, 2021 is

a. 1,500,000 c. 1,195,797
b. 1,067,676 d. 1,339,227

Numbers 16-17
On January 1, 2022, Hotel Company sold machinery with historical cost of P3,000,000 and accumulated
depreciation of P900,000 in exchange for a 3-year, P2,100,000 noninterest-bearing note receivable due in
equal semi-annual payments every July 1 and December 31 starting on July 1, 2022.

The prevailing rate of interest for this type of note is 10%. Information on present value factors is as follows:

PV of PV of annuity of
Periods 1 at 5% 1 at 5%
3 0.8638 2.7235
6 0.7462 5.0757

16. How much is the interest income in 2022?

a. 88,825 c. 128,964
b. 177,649 d. 164,591

17. How much is the carrying amount of the receivable on December 31, 2022?
a. 1,241,086 c. 1,690,059
b. 982,381 d. 1,594,396

Numbers 14 and 15
On March 1, 2020, Namami Company sold goods to Zomiso Company. Zomiso singed a non-interest bearing
note requiring payment of P60,000 annually for seven years. The first payment was made on March 1, 2020. The
prevailing interest for this type of note at the date of issuance was 10%. Information on present value factors is
as follows:

Periods Present value of 1 PV of annuity of 1

at 10% at 10%
6 0.56 4.36
7 0.51 4.87

18. How much should be reported as sales revenue on March 1, 2020?

a. 420,000 c. 261,600
b. 321,600 d. 292,200

19. What is the amount of interest income for the year 2020?

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 a. 30,000 c. 26,800
b. 26,160 d. 21,800

Numbers 20-23
On December 31, 2020, You Bring Out The Best In Me Like No One Else Can Do Company finished consultation
services and accepted in exchange a promissory note with a face value of P200,000, due date of December 31,
2023, and a stated rate of 5%, with interest receivable at the end of each year.

The fair value of the services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following
interest factors are provided:

Table factors for three periods 5% 10%

Future value of 1 1.15763 1.33100
Present value of 1 0.86384 0.75132
Future value of ordinary annuity 3.15250 3.31000
Present value of ordinary 2.72325 2.48685
annuity

20. What is the amount of consultation service revenue to be present in the company’s income statement?
a. 175,133 c. 150,264
b. 24,869 d. 200,000

21. What is the amount of interest income for the year 2021?
a. 17,513 c. 20,000
b. 10,000 d. 7,513

22. What is the carrying value of notes as of December 31, 2022?

a. 190,909 c. 175,133
b. 182,645 d. 200,000

23. What is the current and noncurrent portion of the notes receivable as of December 31, 2022?

Current portion Noncurrent portion

a. 190,909 9,091
b. 200,000 9,091
c. 190,909 0
d. 200,000 0

24. What of the following items is not matched correctly with its basis of valuation for purposes of reporting on
the statement of financial position?
a. Investment in trading securities -> fair value
b. Long-term interest note with unrealistic rates -> face value
c. Inventories of broker traders -> fair value less cost to sell
d. Bearer plant -> cost less accumulated depreciation and accumulated impairment loss

25. The balance sheet of ARC Reserve Your Seat Now! Company reported the following long-term receivable as
of December 31, 2020:

Note receivable form sale of plant 4,500,000

Note receivable from officer 1,200,000

The following are transactions during 2021 and other information pertaining to the company’s long term
receivables:
a. The note receivable form sale of plant bears interest at 12% per annum. The note is payable in 3
annual installments of P1,500,000 plus interest on the unpaid balance every April 1. The initial principal
and interest payment was made on April 1, 2021

b. The note receivable from officer is dated December 31, 2020, earns interest at 10% per annum, and
is due on December 31, 2021. The 2021 interest was received on December 31, 2021

What is the accrued interest receivable as of December 31, 2021?

a. 385,500 c. 270,000
b. 428,538 d. 505,500
Numbers 26-30

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On January 1, 2022, Stain Company sold a delivery equipment costing P1,000,000 with accumulated
depreciation of P150,000 in exchange of a three year, 10%, P1,800,000 interest bearing note. The note is
collectible in equal annual amount starting December 31, 2022 including interest.

The prevailing rate of interest of similar note on this date was at 12%. The following interest factors are provided:

Periods Present value of 1 PV of annuity of 1

at 12% at 12%
1 0.893 0.893
2 0.797 1.690
3 0.712 2.402

26. How much is the gain or loss on sale of equipment?

a. 740,500 c. 1,131,150
b. 890,300 d. 800,000

27. How much is the interest income in 2022?

a. 198,194 c. 208,836
b. 174,030 d. 180,000

28. How much is the carrying amount of the note on December 31, 2022?
a. 1,349,136 c. 1,200,000
b. 1,769,136 d. 1,169,136

29. How much is the current portion of the note on December 31, 2022?
a. 639,704 c. 589,432
b. 579,704 d. 600,000

30. How much is the noncurrent portion of the note on December 31, 2022?
a. 529,244 c. 589,244
b. 501,986 d. 20,287

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 Practice Set

Use the following information for the next two (2) questions:
On January 1, 2020, Jannel Company sold equipment with a carrying amount of P4,800,000 in exchange for
P6,000,000 non-interest bearing note due January 1, 2023. There was no established exchange price for the
equipment. The prevailing interest rate for this note was 10%. The present value of 1 at 10% for three periods
is 0.75.

1) What amount should be reported as gain or loss on sale of equipment?

A. 1,200,000 gain B. 2,700,000 gain C. 300,000 gain D. 300,000 loss

2) What amount should be reported as interest income for 2020?

A. 600,000 B. 500,000 C. 450,000 D. 90,000

Use the following information for the next four (4) questions:
On December 31, 2020, Janice Company sold used equipment with carrying amount of P2,000,000 in
exchange for a non interest bearing note of P5,000,000 requiring ten annual payments of P500,000. The
first payment was made on December 1, 2021. The market interest for similar note was 12%. The present value
of an ordinary annuity of 1 is 5.65 for ten periods and 5.33 for nine periods.

3) What is the carrying amount of the note receivable on December 31, 2020?
A. 5,000,000 B. 2,825,000 C. 2,665,000 D. 4,500,000

4) What is the gain or loss on sale of equipment to be recognized in 2020?

A. 3,000,000 B. 2,175,000 C. 825,000 D. 0

5) What amount should be recognized as interest income for 2021?

A. 600,000 B. 339,000 C. 319,000 D. 300,000

6) What is carrying amount of the note receivable on December 31, 2021?

A. 2,664,000 B. 4,500,000 C. 2,825,000 D. 2,325,000

Use the following information for the next three (3) questions:
On January 1, 2023, Northface sold a machine in the ordinary course of business in exchange for a noninterest
bearing note requiring ten annual payments of P1,000,000. The first payment was made on December 31,
2023. The market interest rate for similar note at date of issuance was 8%. The present value of an ordinary
annuity of 1 at 8% is 6.71 for ten periods. The present value of annuity due of 1 at 8% is 7.25 for ten periods.

7) What is the carrying amount of the note receivable on January 1, 2023?

A. 5,710,000 B. 7,250,000 C. 6,250,000 D. 6,710,000

8) What is the interest income for 2023?

A. 500,000 B. 580,000 C. 536,800 D. 376,800

9) What is the carrying amount of note receivable on December 31, 2023?

A. 6,246,800 B. 7,246,800 C. 6,830,000 D. 6,750,000

10) On December 31, 2023, Foster Corporation sold for P750,000 an old machine having an original cost of
P1,350,000 and a book value of P600,000. The terms of the sale were as follows:
P150,000 downpayment
P150,000 payable on December 31 each of the next four years

The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of
transaction. What is the amount of interest income should be reported in the statement of
comprehensive income for the year ended December 31, 2026?
A. 12,385 B. 24,748 C. 34,172 D. 43,736

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