ACCTG101 Receivables IV

ACCTG101 Receivables IV

Arthur Rosada, CPA

INITIAL RECOGNITION

Accounts receivable are initially recognized at face amount.

Long-term notes receivables which bears no interest or an interest which is unreasonably low shall be recognized initially at discounted value.

NON-INTEREST BEARING NOTE

A non-interest bearing note does not bear interest on the face of the note. This means that there is no separate stipulation for interest. 

Does this mean that there is no interest?

NO.

It only means that interest is already within the face amount. In order to solve for the discounted amount or the amount including interest, one has to solve for its present value.

ILLUSTRATION

NON-INTEREST BEARING NOTE

On January 1, 2020, the business received a promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P82,300 the day before that. The note is due on December 31, 2023. How much should be recorded as the net amount for the note receivable if the present value factor for an amount to be received four years from now is 0.823 using 5% as the interest rate?

EXPLANATION:

100,000 x 0.823 = 82,300

The present value factor, which is given in this case, could be solved as follows:

1 divided by [1.05 to the fourth power] = 0.823

It must be noted, however, that the note receivable account to be recorded should amount to 100,000. A contra-asset account, the discount on note is recognized to reduce the carrying amount of the note to its discounted amount or present value. Hence, the entry is

Note Receivable         100,000

  Discount on note                             17,700

  Equipment                                       82,300

The discount on note or the difference between the face amount and the present value or discounted amount is the interest expected to earned during the lifetime of the note.

This means that upon its recording, the discount on note is the unearned interest which is expected to be earned in the future.

Of course, in the previous illustration, if the equipment was purchased the day before the day of its sale at 80,000, it means that the items was sold for more than its cost. If that is the case, the entry should have been

Note Receivable         100,000

  Discount on note                             17,700

  Equipment                                       80,000

  Gain                                                 2,300

Multiple Choice

On January 1, 2020, the business received a promissory note whose face amount is P200,000. It was received for a piece of equipment, which was erroneously purchased at P160,000 the day before the day of sale. The note is due on December 31, 2023. How much should be recorded as the net amount for the note receivable on January 1, 2020 if the present value factor for an amount to be received four years from now is 0.823 using 5% as the interest rate?

• 200,000

• 82,300

• 160,000

• 164,600

EXPLANATION:

200,000 x 0.823 = 164,600

Multiple Choice

On January 1, 2020, the business received a promissory note whose face amount is P200,000. It was received for a piece of equipment, which was erroneously purchased at P160,000 the day before that. The note is due on December 31, 2022. How much should be the carrying amount of the note receivable on December 31, 2020 if the present value factor for an amount to be received four years from now is 0.823 using 5% as the interest rate and the present value factor for 3 periods using 5% as rate is 0.864?

• 200,000

• 182,300

• 172,800

• 164,600

EXPLANATION:

On January 1, the discounted amount of the note is

200,000 x 0.823 = 164,600

On December 31, 2020, one year has already passed. Hence, there are only 3 year remaining. The discounted amount on that date is

200,000 x 0.864 = 172,800

The difference between 164,600 and 172,800 is a reduction to the discount on note or unearned interest. The journal entry to record such is

Discount on note        8,200

  Interest income                    8,200

Interest income could also be computed as follows:

164,600 [principal amount on January 1] x 0.5 = 8,230

The difference of 30 in the 8,200 and 8,230 computations is only due to rounding off.

Multiple Choice

On January 1, 2020, the business received a promissory note whose face amount is P200,000. It was received for a piece of equipment, which was erroneously purchased at P160,000 the day before that. The note is due on December 31, 2022. How much should be recorded as interest income for year 2020 if the present value factor for an amount to be received four years from now is 0.823 and the present value factor for 3 periods is 0.864?

• 8,200

• 10,000

• 8,000

• 18,000

EXPLANATION:

On January 1, the discounted amount of the note is

200,000 x 0.823 = 164,600

But on, December 31, 2020, one year has already passed.

Hence, there are only 3 year remaining. The discounted amount on that date is

200,000 x 0.864 = 172,800

The difference between 164,600 and 172,800 is a reduction to the discount on note or unearned interest.

The journal entry to record such is

Discount on note        8,200

  Interest income                    8,200

Multiple Choice

On July 1, 2020, an entity obtained a two-year 10% note receivable for service rendered. At that time, the market rate of interest is also 10%. The note is due on June 30, 2024. Interest is receivable every June 30 starting June 30, 2021. Interest receivable on December 31, 2020 is

• 5% of the face amount of the note

• 10% of the face amount of the note

• 5% of July 1, 2020 present value

• 10% of July 1, 2020 present value

EXPLANATION:

The applicable annual rate is 10% but the period from July 1 to December 31 of that year is only 6 months.

Hence, 10% x 6/12 is 5%.

Multiple Choice

The interest on a non interest bearing note is equal

• The excess of the face value over the present value

• The excess of the present value of over the face value

• The excess of the market value over the present value

• Zero

EXPLANATION:

The discount on note or the excess of the face amount over the present value is the unearned interest which will be earned in the future.

ILLUSTRATION

INTEREST BEARING NOTE

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every December 31, starting on December 31, 2020. How much should be recorded as the net amount for the note receivable if the present value factor for an amount to be received four years from now is 0.823 using 5% as the interest rate?

EXPLANATION:

If the note bears interest, which is the same as the prevailing interest rate, the face amount represents only the principal.

In this case, the related 5% interest is separately stipulated from the 100,000 principal amount.

ILLUSTRATION

INTEREST BEARING NOTE

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every December 31, starting on December 31, 2020. How much should be recorded as interest income for 2020?

EXPLANATION:

100,000 x 0.05 = 5,000

Multiple Choice

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every December 31, starting on December 31, 2020. How much should be the interest receivable in the statement of financial position dated December 31, 2020?

• 100,000

• 10,000

• 5,000

• 0

EXPLANATION:

Take note that interest recording at the end of 2020 shall be

Cash                           5,000

  Interest income                    5,000

This means, that there is no interest receivable because it has already been received.

Multiple Choice

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every January 1, starting on January 1, 2021. How much should be the interest receivable in the statement of financial position dated December 31, 2020?

• 100,000

• 10,000

• 5,000

• 0

EXPLANATION:

Take note that interest recording at the end of 2020 shall be

Interest receivable       5,000

  Interest income                    5,000

Under accrual basis of accounting interest income shall already be recorded for one year because the related amount has already been earned for the year despite the fact that it has not yet been collected. Hence, a receivable account is recorded.

On January 1, 2021, this will be recorded

Cash                           5,000

  Interest receivable                5,000

On January 1, 2021, there will be no more receivable after receipt of the amount. But, on December 31, 2020, the receivable exists.

Multiple Choice

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every July 1 and January 1, starting on July 1, 2020. How much should be the interest receivable in the statement of financial position dated December 31, 2020?

• 10,000

• 5,000

• 2,500

• 0

EXPLANATION:

The interest for January to June has already been received on July 1. There is no more receivable.

The interest for July to December will be received on January 1.

Hence, on December 31, 2020, there still exists an interest receivable related to this.

Multiple Choice

On January 1, 2020, the business received a 5% interest-bearing promissory note whose face amount is P100,000. It was received for a piece of equipment, which was erroneously purchased at P100,000 the day before that. The note is due on December 31, 2022. Interest is receivable every July 1 and January 1, starting on July 1, 2020. How much should be the interest income for the year ended December 31, 2020?

• 10,000

• 5,000

• 2,500

• 0

EXPLANATION:

The interest for January to June has already been received on July 1. There is no more receivable.

The interest for July to December will be received on January 1.

Hence, on December 31, 2020, there still exists an interest receivable related to this.

But, the requirement is interest income and not interest receivable. Interest income has already been earned and recorded whether the amount has been collected or not.

Multiple Choice

On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due on September 30 of next year. The interest receivable on December 31 of the current year would consist of an amount representing

• Three months of accrued interest income

• Nine months of accrued interest income

• Twelve months of accrued interest income

• The excess on October 1 of the present value of the note receivable over its fact amount

EXPLANATION:

Interest income is recognized based on the passage of time. Three months has already passed from October 1 up to year-end.

Hence, the related interest income shall already be recognized for that calendar year even if the amount has not yet been collected.

Consequently, the related receivable shall be recognized.

D O N E

Answer the activity related to this discussion on the link provided.

EXPLANATION:

The interest for January to June has already been received on July 1. There is no more receivable.

The interest for July to December will be received on January 1.  Hence, on December 31, 2020, there still exists an interest receivable related to this.

But, the requirement is interest income and not interest receivable. Interest income has already been earned and recorded whether the amount has been collected or not.