Notes Receivables
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
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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:
- interest-bearing note
- noninterest bearing note
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Notes Receivables. (2018, Jun 01). Retrieved from https://phdessay.com/notes-receivables/
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