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Notes Receivable/Payable

julianrey15

kuya kuya!! :D accountancy student din po ako :D
paturo naman po nung discounting of own notes. yung interest bearning at non interest bearing, yung pag aammortize tska po yung mga entries na kelangan kase po sa wednesday ay exam ko na po sa financial accounting 1 :D naghahanda lang po ako.

tska po kuya yung sa assignment of a/r yung mga meron pang conditional sales at secured borrowings. kase po hindi masyadong nadiscuss yun at natatakot lang po akong baka iexam din yun kaya papaturo po ako. ty po! :)

lau

kuya padiscuss naman po ng notes receivable po lalo na po ung restructuring ng notes… TY

Ano ba ang promissory note? Para saan ba ito?

According sa Act No. 2031, Chapter 16, Section 184 (sa ating Negotiable Instruments Law)

Sec. 184. Promissory note, defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise inwriting made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

Sa madaling sabi, ito yung utang na sinulat mo, binigay mo sa nagpautang sayo at sinasabi mo na “babayaran mo yun, promise”. Kaya promissory note, hehehe. But seriously, ganon nga yun. Kung mapapansin nyo, sa definition, may mga highlighted parts. Yun kasi yung mga elements ng isang NegotiablePromissory note. Pero since financial accounting ang itatalakay ko dito, hindi nyo naman kelangang hanapin yan sa quiz nyo. Ang importante sa test nyo sa financial accounting, yung mga data sa promissory notes.

I. TYPES

There are two types of Notes (receivable/payable).

  • Interest-Bearing Notes
  • Non-interest Bearing Notes

Sa dalawang nabanggit, tandaan niyo palagi na parehong may interest yan. Ang interest kasi ay ang “payment for the use of money”. Ano ang pinag-iba ng dalawa?

Sa interest-bearing notes, the rate is applied to the FACE of the note because the interest is not imputed in the face amount of the note yet. So kung may interest bearing note ka payable in one year worth P2,000 at an interest rate of 3% per annum, sa isang taon, ang interest nya ay P60

Sa non-interest bearing notes, ang interest ay imputed na sa FACE amount ng note. So, pag nakita mo yung face amount non-interest bearing note, kasama na dun yung interest. Kung baga, yun yung future value ng note mo (Principal plus Interest). So, ano gagawin mo para macompute mo yung interest? Edi i-present value mo yung note. So sa example kanina, kung may NON-interest bearing note ka payable in one year worth P2,000 at an interest rate of 3% per annum, sa isang taon, ang interest mo ay P58 (explain ko mamaya).

II. EXAMPLES and ENTRIES

Tandaan natin:

  • palaging mag-aaccrue ng interest at year end (pag long-term ang notes, meaning extends to more than 1 year)
  • alamin muna kung interest bearing or non-interest bearing ang note. Malalaman mo naman ito depende sa wording ng problem. Usually pag interest bearing ang sinasabi “…bearing an interest of”  o di kaya   “…an interest bearing note”.
  • carefully take note of the DATE for it is important in computing the interest.
  • Kung serial (installment) ang bayad ng principal, mag-ingat. Dapat iamortize ang principal palagi para tama ang interest na makokompute mo.
  • ang rate na binibigay, unless otherwise specified, ay ANNUAL interest. So pag short term lang ang note, palaging iappropriate based lang kung gano katagal yung note.

INTEREST BEARING NOTE

1.  Assume that on April. 1 2010, Tomasino Corp. issued a 30-day note for P2,000, bearing an interest of 2% per annum. What are the entries?

notes.png picture by joseph0487

we had an interest of 3 pesos computed as (2,000 * 2% * 30/360). Tandaan, inappropriate ko yung interest sa 30 days lang.

2. On June 1, 2010 Dela Rosa wrote a promise to pay P2,000,000 to  Benavides, bearing an interest of 3%, on May 30, 2013 with the interest payable yearly. What are the entries?

notes2.png picture by joseph0487

So at the end of every year (Dec. 31), nag-aaccrue tayo ng interest payable/receivable.

Interest is computed as: (2,000,000 * 3% * 7/12)

So pag tinanong, how much is the total interest for the year:

2010 = 35,000 2011= 60,000    (35,000 + 25,000) 2012 = 60,000    (35,000 + 25,000) 2013= 25,000

ang interest for the year ay ang total na interest na na-incur/earned for the whole year

Madali lang diba?

NON-INTEREST BEARING NOTE

Sa non-interest bearing note entries, parang bonds lang yan. Hindi gaano naiiba yung entries nito sa bonds kasi dito, we’ll use a “Discount on Notes Payable” account. The discount will represent a Deferred Interest Income (on the payee’s side) or an Prepaid Interest Expense (on the maker’s side) which has to be amortized yearly to reflect in the income statement the amount being recognized as interest income/expense.

Sa non-interest bearing note, ang PROCEEDS mo ay equal sa present value ng note mo (Face Amount minus Discount). So binawas yung interest. Sa maker’s side, kaya para syang Prepaid Interest kasi imbes na matatanggap mo yung buong amount ng face, binawas na yung imputed interest kaya yung proceeds mo face amount minus discount. Sa payee’s side, kaya parang deferred interest income sya kasi yung binigay mong proceeds sa nangugutang, mas mababa sa face value kasi nga binawas mo yung interest so in effect parang bayad na yung interest. Confused much? Tignan nyo yung examples para medyo maliwanagan kayo.

SITUATION A – LUMP SUM PAYMENT OF PRINCIPAL AT THE END

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of P3,455,350. Assume that the company uses calendar year as its accounting period. Give the entries.

Dito, hindi sinabi ang rate. So we have to compute for the effective interest rate. The fair market value of the machine is considered as the present value of the note kasi yun yung proceed na natanggap mo. So lumalabas, kung at the end, babayaran ni St. Raymund si Beato Angelico ng total of P4,000,000 edi may interest na P544,650. Ang face amount ng note ay  P4,000,000 kaya dun sa 4M na yun, imputed na ang interest. Kaya kelangan nating kunin yung effective rate.

Ang PV rate natin ay 3,455,350 / 4,000,000 = 0.8638 kung titignan nyo sa PV of a Single Payment table yan sa period na 3 years, lalabas na 5% ang Effective Annual Rate. Hindi naman siguro ipapacompute ng prof nyo yan. Malamang yan sasabihin nalang yung rate or magsusupply sila ng table.

nonint-1.png picture by joseph0487

The effective interest rate is applied to the carrying value of the note. Ito ang table ng interest at carrying value tapos papakita ko kung paano kinompute yung yearly interest

NOTES3.png picture by joseph0487

Since hindi sakto yung end of period sa calendar end period, yung interest iaappropriate natin. Kung baga ganito yung logic kung paano kinukuha yung accrual ng interest every Dec. 31

interestillust.png picture by joseph0487

Clear?

Usually naman tinatanong sa test yung CV at December 31 (year end). Carrying value is computed as Notes Receivable minus Discount on Notes receivable.

disctamort.png picture by joseph0487

SITUATION B – PERIODIC PRINCIPAL PAYMENT

Ang pinag-iba naman nito sa unang situation, yung principal binabayaran every period.  (parang serial bonds naman to)

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of P3,771,481. The principal is to be paid P1,333,333  every April 30. Assume that the company uses calendar year as its accounting period. Give the entries.

Syempre kelangan nating kompyutin yung effective annual rate. Since lumalabas na parang annuity ito, yung PV ng Note (the fair value of the machine) is to be divided by the annuity.

PV Factor = 3,771,481 / 1,333,333

PV Factor = 2.8286

if you’ll look at the PV of Ordinary Annuity Table, this amount will fall under 3% (for 3 periods, syempre).

So, eto mga entries

sernotes-1.png picture by joseph0487

Bale yung entries kanina nadagdagan ng Periodic Payment every April 30. Saka take note of the interest, always apply the interest on the carrying value after the payment of principal.

ito yung computation ng interest saka yung table ng amortization:

noteamort.png picture by joseph0487

DISCOUNTING OF NOTES RECEIVABLE

Nagdidiscount ang isang entity ng kanyang Notes Receivable kung kailangan nito ng salapi/cash immediately. Bale, imbes na hihintayin nyang matapos yung term ng notes, ibebenta nalang nya ang note nya sa bank (termed as discounting). Pero syempre, the bank would withhold a certain amount na magsisilbing kabayaran mo sa pagbigay nila sayo ng immediate cash (which is called the discount). Let’s not confuse the term “discount” in this topic with the “discount on notes receivable”. Magkaiba yun.

So, when we discount, makakatanggap tayo ng Cash, tatanggalin natin sa balance sheet ang Notes Receivable (since binenta nga natin) at mayroon tayong Interest Gain/Loss from Discounting.

Ang Discount naman ay kino-compute as (MV * Discount Rate * Remaining Holding Period/365)

Ang proceeds na matatanggap natin ay equal sa MATURITY VALUE NG NOTES minus THE DISCOUNT (MV – Disct)

So, let’s say for example De Porres discounted his120-day, 7%,  P6,000 note to the bank for 18% discount after holding it for 40 days.

1. Compute for the Maturity value of the Note

6,000 * 7% * 120/365 = 138 interest

138 + 6000 = 6,138.08 MV

2. Compute for the Discount

6,138.08  * 18% * 80/365 = 242.16

3. Compute for the Proceeds

6138.08 – 242.16 =  5,859.92

Entries:

(dr) Cash        5,859.92

(dr) Interest Expense   186.08

(cr) Notes Receivable      6,000

(cr) Interest Revenue     46

TAKE NOTE: Be careful of the denominator pag nagkokompyut kayo ng interest sa discounting. Always use the whole year’s days 360 or 365 NOT the term of the note.


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  1. julianrey15
    January 3, 2010 at 8:29 pm

    e kuya?? kelan po ako mgrerecognize ng GAIN/LOSS? kase po ngbasa ako ng mga books, mga 3 books na nabasa ko at iba iba ang pagsagot nila sa problem merong minsan sabi nung isa po, kpag mas mataas si PV sa FV, credit ka daw po ng Discount on N/R then if mas mtaas nman si FV kay PV, Premium on Notes/R naman daw po eh? tpos sabi nman dun sa isa, mgrerecognize ka nman ng Gain/Loss? yung isa nman po merong Unearned Interest income po???? naguguluhan na nga po ako eh. tpos meron pa pong ganito, kung hindi nman given si sales price ang magic niya po ay ganito, PV + FMV = sales price. kuya bigay po kayo ng comprehensive na tanong yung meron na pong non-current/current portion with matching amortization table for both interest and non interest bearing notes 🙂 TY po!

  2. julianrey15
    January 3, 2010 at 8:39 pm

    tska kuya kuya! ang Discount on notes receivable po ba ay same sa Unearned Interest Income??? tsaka new term lng po sken yung Premium on notes Rec. ano po yun?? @_____@

  3. 4th_Yr_AMV
    January 14, 2010 at 11:17 pm

    Kuya paano po kapag ang problem ganito.A four month non-interest bearing note with face value 375 000 was issued in exchanged of an equipment sold with carrying amount of 350 000. The prevailing interest rate is 4%.

    How much is the gain or loss in the sale of equipment?

    Financial Accounting Approach

    • January 15, 2010 at 10:20 pm

      Kapag ang note, less than 1 year, hindi na kelangang ipresent value. Just get the gain/loss based sa face ng notes. In this case, four months lang (less than 1 year) ang notes payable so di na kelangang ipresent value. So,
      (dr) Notes Receivable 350,000
      (dr) Loss 25,000
      (cr) Equipment 375,000

  4. 4th_Yr_AMV
    January 18, 2010 at 12:09 am

    thanks…

  5. rddalupang
    January 29, 2010 at 12:27 am

    kuya, d ko maintindihan yung amortization table….

  6. Sinister
    February 7, 2010 at 8:38 am

    eh pano po kung ang tanong eh..
    How much should be presented as current and non-current?(non-interest bearing)
    tapos may sinabi pa na including the interest receivable…
    Aud probs po kasi sya tapos nalito ako dun sa tanong…
    ang date pa nya hindi january 1… paki explain naman po using an amortization table… salamat!!

    • February 7, 2010 at 10:43 am

      Sa current/non-current part, the easiest and simplest way to do it is:

      Current Part = Carrying value on the next amortization date (minus) Carrying value as of present date.

      sa current part kasi, yun yung “CURRENTLY MATURING AMORTIZATION”. So kung magkano yung aamortize sa carrying value this coming year, yun yung current part

      Non-Current Part = Carrying value as of present date (minus) Current part.

      so yung natitira sa carrying value matapos mo tanggalin yung current part, yun na yung noncurrent part.

      Tapos, yung interest receivable, yun yung inaccrue mong interest as of balance sheet date since iba yung b/s date saka yung amortization date. makukuha mo yun by doing this:

      CV as of last amortization date (times) interest rate (prorate accdg to how many months earned)

      Tapos kung ang tanong ay current part including the interest receivable, add mo lang yung Current part ng Notes saka yung interest receivable na nakuha mo.

      (wag nyo po imemorize yung formula, mas okay kung naiinitindihan nyo kung bakit ganon)

      🙂

  7. Elvin
    February 8, 2010 at 12:33 am

    Hi kuya,

    Pakitulungan mo naman ako sa inventory na topic.
    Sino ba talaga ang owner kapag ang goods are in transit at ang terms e:
    A. FOB shipping point
    B. FOB Destination

    Kailan iinclude sa inventory, magrerecord ng purchases at sales?
    Nakakalito po kasi lalo sa aud prob.

    Thanks.

  8. hayashi
    July 7, 2010 at 6:18 am

    Kuya, bakit po ganun ung entry sa discounting of notes receivable. Kasi sa book po ni valix ganito ang magiging entry:
    (dr) Cash 5,859.92
    (dr) Interest expense 140.08
    (cr) Notes receivable 6,000.00
    Parang ang labas e nai-set off ung interest revenue dun s interest expense???
    Sa entry niyo po, ganito ang naintindihan ko:
    1. ung dr to cash na 5,859,92 ay ung net proceeds.
    2. ung cr to notes receivable na 6,000.00 ay ung face value nung note.
    3. ung cr to interest revenue na 46.00 ay ung interest na na-earn for 40 days (6,000 * 7% * 40/365 = 46)
    4. ung dr to interest expense na 186.08 ay parang balancing figure na lang??? hehe. di ko po kasi gets kung san galing ito. hehehe. paano po ba nakuha ito? thanks po! ^_^

  9. hayashi
    July 7, 2010 at 6:22 am

    ahy, kuya! may napansin po ako. Mukhang may typo error po dito sa may bandang “6138.08 – 242.16 = 5,859.92” Dapat po 5,895.92 un. ^_^
    pero un pa rin po ang tanong ko, san po nanggagaling ung dinedebit sa interest expense? thanks po. ^_^

  10. dee madrilejo
    November 16, 2010 at 2:46 am

    grabe, ang laking tulong ng site na to sa akin…

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