Illustrative Problem: Notes Receivable

For the year 2019, ABC Co. received the following promissory notes:
Date of Note Face Value Maturity Date Interest Rate Per Annum
Apr. 01, 2019 P300,000 Apr. 01, 2021 12%
Jul. 01, 2019 600,000 P200,000 every July 1, starting July 1, 2020 Non-interest bearing
Oct. 01, 2019 450,000 Oct. 01, 2021 Non-interest bearing
The appropriate discount rate for all notes received is 12%. The P300,000 note was for the sale of
merchandise. The P600.000 note was for the sale of equipment with a cost of P800,000 and accumulated
depreciation of P300,000. The P450,000 was for the settlement of a customer’s account amounting to
P358,737.
Required:
A. Give the journal entries for 2019 to record the receipt of the promissory notes and the adjusting entries on
Dec. 31, 2019.
B. Give the journal entry to record collection of note in 2020 and the adjusting entries on Dec. 31, 2020.
C. Prepare a partial balance sheet on Dec. 31, 2020.
D. Give the journal entries for 2021 to record collection of notes receivable and adjusting entry on Dec. 31,
2021.
SOLUTION:
REQUIREMENT A:
2019
Apr. 01 Notes Receivable 300,000
Sales 300,000
Notice that the note receivable is at its face value of P300,000. This is because the carrying amount of an
interest-bearing not is its face value.
Jul. 01 Notes Receivable 600,000
Accumulated Depreciation 300,000
Loss on Sale of Equipment 19,634
Equipment 800,000
Unearned Interest Income 119,634
Face Value of Note P 600,000
Less: Present Value of Note 480,366
Unearned Interest Income P 119,634
Selling Price (Equal to PV of note) P 480,366
Carrying amount of equipment:
Cost P 800,000
Less: Accumulated Depreciation 300,000 500,000
Loss on Sale of Equipment (P 19,634)
Notice that the notes receivable is carried at its face value of P480,366. This is because the basis for
measurement of a long-term non-interest bearing note is present value or discounted value.
The formula for the present value factor is:
-n
PV of an annuity of P1 = 1-(1+i) where n = number of interest periods
i
-3
Substitution: PV of an annuity of P1 = 1-(1+0.12) = 2.401831268
0.12
Note for getting factors using basic calculators:
Input 1.12 then press ÷ (for some calculators, press the ÷ twice), then press =. You should get
-1
0.8928571428571, which represents 1.12 . Pressing equals again (2nd time), you should get
-2 -3
0.7971938775509, which represents 1.12 . Press = once more, and you will get 1.12 , 0.7117802478133.
If you have the GT (Grand Total) function on your calculators, press it and you will get 2.4018312682213.
If not, then after getting 0.7117802478133. (1.12-3), press -1, and you will get -0.2882195721867. Afterwards,
divide it by 12% or 0.12, and you will get -2.4018312682225. (Just disregard the -)
An amortization table (effective interest method) will appear as follows:
Date Collection Interest Principal PV/Carrying Amount
07-01-2019 P480,366
07-01-2020 P 200,000 P 57,644 P 142,356 338,010
07-01-2021 200,000 40,561 159,439 178,571
07-01-2022 200,000 **21,429 *178,571 -
Interest (07-01-2019 to 07-01-2020) = P480,366 x 12% = P57,644
Principal (07-01-2020) = Collection of P200,000 – P57,644 = P142,356
Present Value (07-01-2020) = P480,366 – P142,356 = P338,010
*The Principal on the last period is matched against the Present Value/Carrying Amount of the note from the
preceding period. **The interest for the last period is SQUEEZED to act as a BALANCING FIGURE so that the
PV or CA at the end of the note’s term will be zero. This is due to rounding off.
If on this date (July 01, 2019), a balance sheet is prepared, this promissory note will appear as follows:
Current Assets:
Trade and Other Receivables:
Notes Receivable P 200,000
Less: Unearned Interest Income 57,644 P 142,356
Non-current Assets:
Other Non-current Assets:
Notes Receivable P 400,000
Less: Unearned Interest Income *61,990 P338,010
*Interest for last two periods 40,561 + 21,429 = P61,990
The face value of P200,000 and related interest of P57,644 are shown as current because they are applicable
for the 1st year. Anything in excess is classified as non-current.
2019
Oct. 01 Notes Receivable 450,000
Accounts Receivable 358,737
Unearned Interest Income 91,263
Face Value of Note P 450,000
Less: Present Value of Note 358,737
Unearned Interest Income P 91,263
Again, the notes receivable is carried at its present value of P358,737 because it is a long-term non-interest
bearing note. The formula for its present value is:
-n
PV of P1 = (1+i)
-2
Substitution: PV of P1 = (1+0.12) = 0.797193877
An amortization table (effective interest method) will appear as follows:
Date Interest Unearned Interest Income Present Value/Carrying Amount
10-01-2019 P 91,263 P358,737
10-01-2020 P 43,048 48,215 401,785
10-01-2021 *48,215 - 450,000
Carrying Amount, Oct. 01, 2019 = P450,000 – P91,263 = P358,737
Interest (Oct. 01, 2019 to Oct. 01, 2020) = P358,737 x 12% = P43,048
Carrying Amount, Oct. 01, 2020 = P450,000 – P48,215 = P401,785
Interest (Oct. 01, 2020 to Oct. 01, 2021) = P401,785 x 12% = P48,215
Carrying Amount, Oct. 01, 2021 = P450,000 – 0 = P450,000
The interest for the last period is SQUEEZED to act as a BALANCING FIGURE so that the PV or CA at the end of the note’s term will
be equal to its face value and the Unearned Interest Income will be zero. This is due to rounding off.
Adjusting Entries:
2019
Dec.31 Interest Receivable 27,000
Interest Income (P300,000 x 12% x 9/12) 27,000
To take up accrued interest on the Apr.1, P300,000 note.
Dec.31 Unearned Interest Income 28,822
Interest Income (P57,644 x 6/12) 28,822
To amortize unearned interest on the July 1, P600,000 note
Dec. 31 Unearned Interest Income 10,762
Interest Income (P43,048 x 3/12) 10,762
To amortize unearned interest on the Oct. 1, P450,000 note

REQUIREMENT B:
2020
Jul. 01 Cash 200,000
Notes Receivable 200,000
To record the 1st annual collection on the P600,000 note
Dec. 31 Interest Receivable 36,000
Interest Income (P300,000 x 12%) 36,000
To take up accrued interest on the Apr.1, P300,000 note.
Dec. 31 Unearned Interest Income 49,102.50
Interest Income *(28,822 + P40,561 x 6/12) 49,102.50
To amortize unearned interest on the July 1, P600,000 note
Dec. 31 Unearned Interest Income 44,339.75
Interest Income **[(P43,048-P10,762)+(48,215 x 3/12)] 44,339.75
To amortize unearned interest on the Oct. 1, P450,000 note
*Please see amortization schedules for interest on P600,000 note.
P57,644 represents interest from Jul. 01, 2019 to Jul. 01, 2020
P40,561 represents interest from Jul. 01, 2020 to Jul. 01, 2021
P21,420 represents interest from Jul. 01, 2021 to Jul. 01, 2022
In order to get the interest income from Jan. 01, 2020 to Dec. 31, 2020, the two figures will be prorated:
x 6/12 (Jul. 01, 2019 to Dec. 31, 2019) = 28,822 } 2019
57,644
x 6/12 (Jan. 01, 2020 to Jul. 01, 2020) = 28,822
x 6/12 (Jul. 01, 2020 to Dec. 31, 2020) = 20,280.50 } 2020 = 49,102.50
40,561
x 6/12 (Jan. 01, 2021 to Jul. 01, 2021) = 20,280.50
x 6/12 (Jul. 01, 2021 to Dec. 31, 2021) = 10,714.50 } 2021 = 30,995
21,429 } 2022
x 6/12 (Jan. 01, 2022 to Jul. 01, 2022) = 10,714.50

*Please see amortization schedules for interest on P450,000 note.

P43,048 represents interest from Oct. 01, 2019 to Oct. 01, 2020
P48,215 represents interest from Oct. 01, 2020 to Oct. 01, 2021
In order to get the interest income from Jan. 01, 2020 to Dec. 31, 2020, the two figures will be prorated:
x 3/12 (Oct. 01, 2019 to Dec. 31, 2019) = 10,762 } 2019
43,048 x 9/12 (Jan. 01, 2020 to Oct. 01, 2020) =
32,286
x 3/12 (Oct. 01, 2020 to Dec. 31, 2020) = 12,053.75 } 2020 = 44,339.75
48,215 } 2021
x 9/12 (Jan. 01, 2021 to Oct. 01, 2021) = 36,161.25
REQUIREMENT C:
ABC Co.
Partial Balance Sheet
December 31, 2020
Current Assets:
Trade and Other Receivables:
Notes Receivable: (1) P 950,000….
Less: Unearned Interest Income (2) 67,156.25 P 882,843.75
Interest Receivable (3) 63,000….
Non-current Assets:
Other Non-current Assets:
Notes Receivable (4) P 200,000….
Less: Unearned Interest Income (5) 10,714.50 P 189,285.50
1. P300,000 + *P200,000 + P450,000 = P950,000
*Portion of the P600,000. P200,000 was already collected on July 1, 2020. The P200,000 in this section
represents the portion collectible on July 1, 2021.
2. See explanation on previous page
On P600,000 note P 39,995….
On P450,000 note 36,161.50 P 61,156.25
3. P27,000 (from 2019) + P36,000 (from current year) = P63,000
4. Portion of P600,000 note: P200,000 collectible on July 1, 2022
5. Interest from P600,000 note to be earned from Jan. 1, 2022 to Jul. 1, 2022 (See explanation in prev. page)

REQUIREMENT D:
2021
Apr. 01 Cash 372,000
Notes Receivable 300,000
Interest Receivable 63,000
Interest Income (P300,000 x 12% x 3/12) 9,000
To record full payment of the P300,000 note.
Jul. 01 Cash 200,000
Notes Receivable 200,000
To record the 2nd annual collection on the P600,000 note
Oct. 01 Unearned Interest Income 36,161.25
Interest Income 36,161.25
To amortize the remaining Unearned Interest of the P450,000 note.
Oct. 01 Cash 450,000
Notes Receivable 450,000
To record collection of the face value of the P450,000 note.
Adjusting Entry:
Dec. 31 Unearned Interest Income 30,995
Interest Income 30,995