Notes Receivables

NOTES RECEIVABLE * Represents claims for which formal peckers 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. banknotes dues are considered current asset if they are to be paid indoors 1 year and non- current if they are expected to be paid after one year. NEGOTIABLE PROMISSORY NOTES * Unconditional promise in pen made by one person to another, signed by the maker, engaging to pay in demand or at the fixed determinable rising time a sum certain in money to order or to bearer.An entity owned a tract of land costing P 800,000 and exchange 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 not e 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 matter to income 120,000 INITIAL MEASUREMENT * Conceptually, notes receivable shall be calculated 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- passenger car or NONINTEREST- BEARING. INTEREST- BEARING LONG TERM NOTES are measured at FACE VALUE which is actually the present treasure 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. resultant MEASUREMENTAmortized Cost * the amount at which the note receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of every difference between t he 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 . 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 Receivable? 1,526,400 Accrued interest receivable? 2011 720,000 2012 806,400 1,526,400 P roblem 7-3 BUG COMPANY (NONINTEREST- BEARING NOTE 1) 2010 Jan. 1Note receivable600,000 Sales540,000 unearned interest income 60,000 DATE NOTES RECEIVABLE BALANCE fragment 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. 31Cash200,000Notes receivable200,000 honorary interest income20,000 Interest income20,000 2012 Dec. 31Cash200,000 Note receivable200,000 Unearned interest income10,000 Interest income10,000 PROBLEM 7-4 IMPRESS COMPANY (NONINTEREST- BEARING NOTE 2) 2010 Jan. 1Cash100,000 Note receivable900,000 Sale? 820,540 Unearned interest income? 179,460 Face value900,000 Present value (300,000*2. 4018)720540 Unearned interest income? 179,460 Present value720,540 Cash received100,000 Sales price? 820,540DATE ANNUAL COLLECTION INTEREST INCOME PRINCIPAL CARRYING AMOUNT Jan. 1, 2010 720,540 Dec. 31,2010 300,000 86,465 213,535 507,005 Dec. 31,2011 300,000 60,841 239,159 267,846 Dec. 31,2012 300,000 32,154 267,846 ? Dec. 31Cash300,000 Unearned interest income 86,465 Note receivable300,000 Interest income 86,465 2011 Dec. 31Cash300,000 Unearned interest income 60,841 Note receivable300,000 Interest income 60,841 2012 Dec. 31Cash300,000 Unearned interest income 32,154 Note receivable300,000 Interest income 32,154