Notes Receivable

Notes Receivable

• A formal claim against another that is evidenced by a written promise, called

promissory note, or a written order to pay at a later date, called time draft.
- Promissory note is an unconditional written agreement to pay to
bearer or to the order of the payee a certain sum of money on a specific or
determinable date.
- Time draft is a written order (made by the drawer), addressed to the
drawee to pay a certain sum of money on a specific or determinable date.
Initial recognition

• Following IFRS 9, a note receivable is initially recognized when the entity becomes a
party to the contractual provision of the instrument, that is when the entity becomes
the payee of the note issued by the maker. A note is initially recognized at the
transaction price based on the circumstance that gives to the receipt of the note,
which is any of the following:
a. The amount of cash given up in exchange for the note;
b. The fair value of the non-cash consideration given up in exchange for the note,
or if such fair value cannot be practically determined, the fair value of the note
received, which is the discounted cash flow of future collections, based on the
implicit interest rate.
Subsequent Measurement

• Notes and accounts receivable meet the requirements in IFRS 9 Financial Instruments
for the financial assets to be classified as subsequently measured at amortized cost.
The two conditions are:
a. The financial asset is held within the enterprise’s business model whose
objective is to hold assets in order to collect contractual cash flows
b. The contractual terms of the financial asset give rise on specified dated to cash
flows that are solely payments of principal and interest.
Types of Notes Receivables

• Interest bearing
- With Realistic interest rates – When a note has a stated rate the approximates the prevailing
market rate for similar notes.
- With Unrealistic interest rates – When a note bears an interest rate that is significantly
different from prevailing interest rate for similar notes, or when the
face value of the note is significantly different from the market value of the
consideration given up in exchange for the note.
• Non-interest bearing or zero-interest bearing
Illustrative example 1: Long-term Interest-
Bearing Note with Realistic Interest Rate
• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation
of P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The 10% interest
rate is a realistic rate of interest for a note of this type.
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020, 2021, 2022 and 2023.
Illustrative example 1: Long-term Interest-
Bearing Note with Realistic Interest Rate
Illustrative example 2: Long-term Interest-Bearing Note with
Unrealistic Interest Rate, one-time payment of Principal

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation
of P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The prevailing rate
of interest for a note of this type is 16%.
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020, 2021, 2022 and 2023.
Illustrative example 2: Long-term Interest-Bearing Note with
Unrealistic Interest Rate, one-time payment of Principal
Illustrative example 3: Long-term Interest-Bearing Note with Unrealistic
Interest Rate, Interest is payable Semi-Annually, One-time Collection of
Principal.

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation
of P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The note requires
interest to be paid semi-annually every June 30 and December 31. The prevailing rate of interest for a
note of this type is 16%.
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020 and 2023.
Illustrative example 3: Long-term Interest-Bearing Note with Unrealistic
Interest Rate, Interest is payable Semi-Annually, One-time Collection of
Principal.
Illustrative example 4: Long-term Interest-Bearing Note with
Unrealistic Interest Rate, Uniform collection of Principal

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation of
P350,000 as of January 1,2020. The company receives 4-year, P100,000, 10% note. The note requires interest
to be paid annually on December 31. The prevailing rate of interest for a note of this type is 16% and the
principal amount of the note is to be paid in four equal annual installments of P25,000 every December 31.
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020
Illustrative example 4: Long-term Interest-Bearing Note with
Unrealistic Interest Rate, Uniform collection of Principal
Illustrative example 5: Long-term Non-interest-Bearing
Note with Unrealistic, One time collection of Principal

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation
of P150,000 as of January 1,2020. The company receives 5-year, P500,000 note. The note is a non-interest
bearing note and the prevailing rate of interest for a note of this type is 10%
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020, 2021, 2022, 2023 and 2024.
Illustrative example 5: Long-term Non-interest-Bearing
Note with Unrealistic, One time collection of Principal
Illustrative example 5: Long-term Non-interest-Bearing
Note with Unrealistic, Uniform collection of Principal

• On January 1,2020, Toshiba Corp sells a machinery costing P500,000 and with accumulated depreciation
of P150,000 as of January 1,2020. The company receives 3-year, P600,000 note. The note is a non-interest
bearing note and the prevailing rate of interest for a note of this type is 14% and the principal amount of
the note is to be paid in the three equal annual installments of P200,000 every December 31.
Required:
A. Compute for the following as of December 31, 2020:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2020, 2021, 2022, 2023 and 2024.
Illustrative example 5: Long-term Non-interest-Bearing
Note with Unrealistic, Uniform collection of Principal
Impairment of
Receivables
Measuring
Impairment loss

• IFRS 9 requires an entity to measure its

expected credit losses not necessarily
based on a loss event but based on
reasonable and supportable information
available without undue cost and effort
and which includes past experiences,
present condition and future
expectations. The IFRS 9 model requires
three stages in impairment measurement
and recognition:
Illustrative Example: Impairment loss

On December 31, 2019, the Reliable Finance Company had a P5,000,000 note receivable from Burgundy Company.
The note bears 10% interest. The books reported accrued interest of P500,000 on this date. Because of financial
distress being suffered by Burgundy Company, Reliable Finance agreed to the restructuring and modification of the
terms of its loan to Burgundy as follows:
- Reduction of principal to P4,000,000
- Reduction of interest to 8% payable annually beginning December 31, 2020.
- Accrued interest on December 31, 2019 is condoned; and
- Principal payment was reset to December 31, 2021.
The prevailing market rate of interest for similar obligations on the date of restructuring decreased to 9%. Use
present value factors rounded two decimal places.
a. At what amount would the restructured notes receivable be reported at December 31, 2019?
b. How much impairment loss should Reliable Finance Company record on December 31, 2019 as a result of the restructuring?
Illustrative Example: Impairment loss
References:
- Asuncion, D. J., Ngina, M. A., & Escala, R. F. (2017). Applied Auditing. Baguio City: Real
Excellence Publishing.

- Millan, Z. V. (2019). Intermediate Accounting (Vol. 1A). Baguio City: Bandolin

Enterprises.

- Robles, N. S., & Empleo, P. M. (2019). Intermediate Accounting (Vol. 1). Mandaluyong
City.

- Valix, C. T., Peralta, J. F., & Valix, C. A. (2019). Intermediate Accounting 1. Manila,
Philippines: GIC Enterprises & Co., Inc.