Notes receivables
Initial measurement of notes receivable
Face value
Interest beairing
Problem 1
January 1, 2021
Carlo Company owned a tract of land costing 500,000
Land 500,000
Cash 500,000
January 1, 2022
Carlo Company sold 1,500,000 to Fernandez corporation and received 3yr note for 1,500,000 plus
interest of 10% annually.
Note receivable 1,500,000
Land 500,000
Gain on sale 1,500,000
December 31, 2022
Accrued interest receivable 150,000
Interest income 150,000
1,500,000 x 10% = 150,000
December 31, 2023
Accrued Interest receivable 165,000
Interest income 165,000
Face Value 1,500,000
1st Accrued interest 150,000
Total 1,650,000
Interest rate 10%
2nd accrued interest 165,000
January 1, 2024
At the time of payment of Fernandez corporation
Cash 1,996,500
Note receivable 1,500,000
Accrued interest receivable 315,000
Interest income 181,500
Computation of accrued interest receivable
2022:1st Acrued interest (1,500,000 x 12%) 150,000
2023:2nd Acrued interest (1,650,000 x 12%) 165,000
Total 315,000
Computation of interest income
Face Value 1,500,000
Accrued interest 315,000
Total 1,815,000
3rd yr interest income (1,815,000x10%) 181,500
Cash received 1,996,500
Noninterest bearing
Problem 2
Covid company manufactures and sells computers. On January 1, 2021, the entity sold a computer
costing 400,000 for 600,000. The buyer signed a Noninterest bearing note for 600,000 payable in three
equal installments every December 31. The cash selling price of the computer is 540,000.
January 1, 2021
Note receivable 600,000
Sales 540,000
Unearned income 60,000
Fair Value 600,000
Present Value (540,000)
Unearned income 60,000
December 31, 2021
Cash 200,000
Note receivable 200,000
Noninterest bearing amounted 600,000 and 3 equal installments
600,000 divide 3 = 200,000
To determined the interest income
1st step: fraction
2021 600,000 6/12
2022 400,000 4/12
2023 200,000 2/12
Total 1,200,000
2nd step: allocate the amount of interest income
2021 60,000 x 6/12 = 30,000
2022 60,000 x 4/12 = 20,000
2023 60,000 x 2/12 = 10,000
3rd step: Prepare journal entry
2021
Unearned interest income 30,000
Interest income 30,000
2022
unearned interest income 20,000
interest income 20,000
2023
Unearned interest income 10,000
Interest income 10,000
Problem 3
Gerber company is a dealer in equipment. On December 31, 2021, the entity sold an equipment in
exchange for a Noninterest bearing note requiring five annual payments of 500,000. The first payment
was made on December 31, 2022. The market interest for similar notes was 8%. The relevant present
value factors are:
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
1. How to calculate the present Value rate? Using Ordinary Calculator
Step 1:
100% + 8% = 108% or 1.08
Step 2
1.08 one click ÷ and click 5 times bakit 5 kase 5 yrs = 0.680583197 or 0.68
2. How to calculate the present value of an ordinary annuity rate?
Step 1:
0.680583197 or 0.68 minus 1 = -0.319416803
Step 2:
Click +/- removed negative sign = 0.319416803
Step 3
0.319416803 divide 8% simplied 0.08 = 3.9927100375 or 3.99
Problem 4
Villan company has an 8% note receivable dated June 30, 2021, in original amount of 1,500,000.
Payments of 500,000 in principal plus accrued interest are due annually on July 1, 2022, 2023 and 2024
In June 30, 2023 statement of financial position, what amount should be reported as a current asset for
interest on the note receivable?
Accrued interest receivable 80,000
Interest income 80,000
(1,000,000 x 8%)
Masipag Company is a dealer in equipment. On December 31, 2021 the entity sold an equipment in
exchange for a Noninterest bearing note requiring five annual payments of 500,000. The first payment
was made on December 31, 2022
The market interest rate for similar notes was 8%
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
1. On December 31, 2021, what is the carrying amount of note receivable?
Note receivable 2,500,000
Sales 1,995,000
Unearned interest income 505,000
2. What amount of interest income should be reported for December 31, 2022?
Unearned interest income 159,600
interest income 159,600
(1,995,000 x 8% )
3. What is the carrying amount of the note receivable on December 31, 2022?
Notes Receivable 2,500,000
Payment annually (500,000)
Total 2,000,000
Unearned income using general ledger total (345,400)
Total carrying amount 1,654,600
4. What amount of interest income should be reported for 2023?
1,654,600 x 8% = 132,368
