Notes receivable are formal promises to pay, usually in the form of negotiable promissory notes which unconditionally promise payment at a future date of a sum certain. When a note matures and is not paid, it is considered dishonored. Notes receivable are initially measured at present value for long-term notes or face value for short-term notes. Interest-bearing long-term notes are measured at face value, while noninterest-bearing long-term notes are measured at present value. Subsequently, all long-term notes receivable are measured at amortized cost using the effective interest method.
Notes receivable are formal promises to pay, usually in the form of negotiable promissory notes which unconditionally promise payment at a future date of a sum certain. When a note matures and is not paid, it is considered dishonored. Notes receivable are initially measured at present value for long-term notes or face value for short-term notes. Interest-bearing long-term notes are measured at face value, while noninterest-bearing long-term notes are measured at present value. Subsequently, all long-term notes receivable are measured at amortized cost using the effective interest method.
Notes receivable are formal promises to pay, usually in the form of negotiable promissory notes which unconditionally promise payment at a future date of a sum certain. When a note matures and is not paid, it is considered dishonored. Notes receivable are initially measured at present value for long-term notes or face value for short-term notes. Interest-bearing long-term notes are measured at face value, while noninterest-bearing long-term notes are measured at present value. Subsequently, all long-term notes receivable are measured at amortized cost using the effective interest method.
Notes receivable are formal promises to pay, usually in the form of negotiable promissory notes which unconditionally promise payment at a future date of a sum certain. When a note matures and is not paid, it is considered dishonored. Notes receivable are initially measured at present value for long-term notes or face value for short-term notes. Interest-bearing long-term notes are measured at face value, while noninterest-bearing long-term notes are measured at present value. Subsequently, all long-term notes receivable are measured at amortized cost using the effective interest method.
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Notes Receivable
- are claims supported by formal
promises to pay usually in the form of notes. Negotiable Promissory Note - is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer. Dishonored Notes - when a promissory notes matures and is not paid. Initial measurement of notes receivable Conceptually, notes receivable shall be measured initially at present value.
Present Value - is the sum of all future cash flows discounted using the prevailing market rate of interest for similar notes.
However, short-term notes receivable shall be measured at face
value. Interest-bearing notes receivable The initial measurement 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 notes receivable
Noninterest long-term notes are measured at
present value whuch is the discounted value of the future cash flows using the effective interest rate. Subsequent measurement Subsequent to initial recognition, long- term notes receivable shall be measured at amortized cost using the effective interest method. Meaning of amortized cost The “amortization cost” is the amount at which the note receivable is measured initially: a. Minus principal repayment b. Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal maturity amount c. Minus reduction for impairment or uncollectibility For long-term noninterest-bearing notes receivable, the amortized cost is the present value plus amortization of the discount, or the face value minus the unamortized unearned interest income. Illustration – Interest bearing note An entity owned a tract of land costing P800,000 and sold the land for P1,000,000.
The entity received a 3-year note for P1,000,000
plus interesr of 12% compounded annually. Journal entries First Year Note receivable 1,000,000 Land 800,000 Gain on sale of Land 200,00
Accrued interest receivable 120,000
Interest Income 120,000 Journal entries (continuation) Second Year Accrued interest receivable 134,400 Interest income 134,400
Face Value 1,000,000
Interest accrued for firsr year 120,000 Total 1,120,000 Interesr for second year 134,400 Journal entries (continuation) Third Year Cash 1,404,928 Notes receivable 1,000,000 Accrued interest receivable 254,400 Interest income 150,528
Face Value 1,000,000
Interest accrued: First year 120,000 Second year 134,400 254,400 Total 1,254,000 Interest for Third year 150,528 Cash received 1,404,928