Notes Receivables

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NOTES RECEIVABLE
* Represents claims for which formal instruments of credit are issued as evidence of debt, such as promissory note. The credit instrument normally requires the debtor to pay interest and extends for time periods of 30 days or longer. Notes receivables are considered current asset if they are to be paid within 1 year and non- current if they are expected to be paid after one year.

NEGOTIABLE PROMISSORY NOTES
* Unconditional promise in writing made by one person to another, signed by the maker, engaging to pay in demand or at the fixed determinable future time a sum certain in money to order or to bearer. An entity owned a tract of land costing P 800,000 and sold the land for P1,000,000. On January 1, 2011 the entity received a 1- year note for 1,000,000 plus interest of 12% compounded annually.

Journal Entry:

First year:

Note receivable1,000,000
Land800,000
Gain on sale of land200,000
#
DISHONORED NOTES
* Promissory note matures and is not paid.
* When the maker of a note fails to pay on the due date, the note receivable is considered to be dishonored. A dishonored note is no longer negotiable. Journal Entry:
2012
Jan. 1 Accounts receivable1,120,000
Notes receivable 1,000,000
Interest income 120,000
#
INITIAL MEASUREMENT
* Conceptually, notes receivable shall be measured initially at PRESENT VALUE. * However, SHORT TERM NOTES are measured at FACE VALUE.
* The initial measurements of LONG TERM NOTES will depend on whether the notes are INTEREST- BEARING or NONINTEREST- BEARING. INTEREST- BEARING LONG TERM NOTES are measured at FACE VALUE which is actually the present value upon issuance. NONINTEREST- BEARING LONG TERM NOTES are measured at PRESENT VALUE which is the discounted value of the future cash flow using the effective interest rate.

SUBSEQUENT MEASUREMENT
Amortized Cost
* the amount at which the note receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial carrying amount and the principal maturity amount minus reduction for impairment or uncollectibility. For long-term noninterest-bearing notes:

Amortized Cost = present value + amortization of the discount Or
Amortized Cost = face value – unamortized unearned interest income Accordingly, only long-term notes receivable will be discussed in conjunction with the present value concept under the following situations:

a. interest-bearing note
b. noninterest bearing note

Problem 7-2 “FATHOM COMPANY” (INTEREST- BEARING NOTE)
2011
Jan. 1Cash1,000,000
Notes Receivable6,000,000
Land5,000,000
Gain on sale of land2,000,000
#
Dec. 31 Accrued Interest Receivable720,000
Interest Income720,000
(6,000,000 x 12%)
#
2012
Dec 31 Accrued Interest Receivable806,400
Interest Income806,400
#
6,000,000| +| 720,000| =| 6,720,000|
| | | *| 12%|
| | | | 806,400|

2013
Jan. 1Cash7,526,400
Notes Receivable6,000,000
Accrued Interest Receivable¹1,526,400
#
Accrued interest receivable¹
2011| | | 720,000|
2012| | | 806,400|
| | | 1,526,400|

Problem 7-3 “BUG COMPANY” (NONINTEREST- BEARING NOTE 1)
2010
Jan. 1Note receivable600,000
Sales540,000
Unearned interest income 60,000
#
DATE| NOTES RECEIVABLE BALANCE| FRACTION| INTEREST INCOME| Dec.31, 2010| 600,000| 1/2| 30,000|
Dec.31, 2011| 400,000| 1/3| 20,000|
Dec.31, 2012| 200,000| 1/6| 10,000|
| 1,200,00| | |

Dec. 31Cash200,000
Notes receivable200,000
#
Unearned interest income30,000
Interest income30,000
#
2011
Dec. 31Cash200,000
Notes receivable200,000
#

Unearned interest income20,000
Interest income20,000
#
2012
Dec. 31Cash200,000
Note...
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