Lesson 5 - Notes and Loans Receivable

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY Accountancy Department
ACCT 1046 - Intermediate Accounting 1

Short Term, Academic Year 2022-2023
Lesson 5: Notes and Loans Receivable
Topics: a. Notes Receivable

b. Loans Receivable
Learning Outcomes: At the end of this module, you are expected to:
1. State the initial and subsequent measurement of notes receivables
2. Learn how to compute for present value factors and how to properly
apply them
3. Learn how to prepare amortization tables
4. Know how to compute for the effective interest rate
5. Account for loans receivables
6. Account for impairment of receivables
Lesson Proper:
Notes Receivables
-is a claim supported by a formal promise to pay a certain sum of money at a specific future date usually in the
form of a promissory note. Can be an interest bearing note or non-interest bearing note.
*Summary of INITIAL and SUBSEQUENT measurement of receivables

Type of receivable Initial Measurement Subsequent Measurement
Short term receivables Fair value plus transaction costs -face amount initially; recoverable
*fair value is equal either to the a. historical cost(net realizable value)
face amount or -present value initially; amortized
b. present value cost
c. transaction price -transaction price initially; updated
using the principles under PFRS 15
Long term receivables bearing Fair value plus transaction plus(FV Recoverable historical cost(net
reasonable interest rate is equal to FA) realizable value)
Long term noninterest bearing note Fair value plus transaction Amortized cost
receivables plus(FV is equal to PV of future
cash flows from the receivable)
ACCT 1046- Intermediate Accounting 1 | 1

Long term receivables bearing Fair value plus transaction plus(FV Amortized cost
unreasonable interest rate is equal to PV of future cash flows
from the receivable)
NOTES:
1. When the cash price equivalent of the non-cash asset given up in exchange of the receivable is
determinable, the fair value of the receivable is equal to the cash price equivalent, except when the practical
expedient allowed by PFRS 15 is applicable.
2. If the initial measurement is cash price equivalent of the non-cash asset given up, the subsequent
measurement is amortized cost
LOAN RECEIVABLE
- Financial asset arising from a loan granted by a bank or other financial institution to a borrower or client
Initial Measurement
- an entity shall measure a loan receivable at fair value plus transaction costs that are directly
attributable to the acquisition of the financial asset
Fair value – normally the transaction price or the amount of loan granted
Transaction costs include:
fees and
commissions paid to agents, advisers, brokers and dealers
levies by regulatory agencies and securities exchange
transfer taxes and duties  direct origination cost
Accounting for origination costs and fees

Origination fees - fees charged by banks against the borrower for the creation of the loan
Direct origination costs – origination or transaction costs not chargeable to customers
• Direct origination costs
• Initially added to the carrying amount of the loan
• Subsequently amortized using the effective interest method
Effect of amortization: decreases both carrying amount of thee loan and interest income
• Indirect origination fees
• Initially deducted from the carrying amount of the loan
• Subsequently amortized using the effective interest method
Effect of amortization: increases both carrying amount of thee loan and interest income
Indirect origination costs
• Expensed immediately
*direct origination costs and fees – included in the calculation of the effective interest rate
Therefore, the initial carrying amount of the loans receivable may be computed as follows:
Principal amount xx
Less: Origination fee received (xx)
Add: Direct origination cost xx
Initial present value or carrying amount xx
Journal entries:
1. To record the loan
Loan receivable xx
Cash xx
2. To record the receipt of origination fees
Cash xx
Unearned interest income xx
3. To record the payment of direct origination costs
Cash xx
4. To record collection of loan receivable
Cash xx
Loan receivable xx
5. To record amortization of unearned interest income
Interest income xx
Subsequent Measurement
- Loan receivable is subsequently measured at amortized cost using effective interest method
Discount Premium
Carrying amount of loan is less than face amount of Carrying amount of loan is greater than face amount
loan of loan
Effective interest rate is higher than nominal rate Effective interest rate is less than nominal rate
*effective interest rate – rate used in present value computations

*nominal interest rate – rate appearing on the face of the instrument
Formula for computing the effective interest

rate:
( PV of X – PV of HR)
X = Higher rate – (HR-LR) x PV of LR – PV of HR
 Present value of loan x effective interest rate = interest income

Face value of loan x nominal rate = interest collection/receivable

Impairment
At each reporting date, an entity shall recognize a loss allowance for expected credit losses as follows:
1. Lifetime expected credit loss – if the credit risk on that financial asset has increased significantly
since initial recognition
2. 12-month expected credit loss – if the credit risk on that financial instrument has not increased
significantly since initial recognition
*credit risk – risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation
 Impairment gain or loss
- An entity shall recognize in profit or loss, as an impairment gain or loss, the amount of
expected credit losses (or reversal) that is required to adjust the loss allowance at the
reporting date
Description PAS 39 PFRS 9

Impairment loss P&L P&L
Impairment gain P&L, with limit* P&L, no limit
Discount rate Original effective rate Original effective rate or
creditadjusted effective interest
rate for purchased or originated
creditimpaired financial assets
*The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost
would have been had the impairment not been recognized at the date the impairment is reversed. The
gain on reversal of impairment may be determined as follows:
Present value of future cash flows using original

effective rate (e.g. P5M) Lower amount
(e.g. P5M)
Would have been amortized Gain on impairment

cost had been vs. there recovery (e.g. P0.2M) –
no impairment (e.g. P&L
P6M) Actual amortized

cost, date of reversal (e.g.
P5M)
 Impairment of receivable
Carrying amount of the receivable xx
Less: Present value of expected future cash flows
discounted using the original effective rate xx
Receivable impairment loss xx
 Present value of expected future cash flows

Date end of Cash flow (CF) Present value factor Total (CF x PVF)
(PVF)
Year 1 XX XX XX
Year 2 XX XX XX
Year n XX XX XX
Total present value of future cash flows XX
Note: The date is from the date of impairment until the date of receipt of cash.
Journal entries
1. Date of impairment
Loan impairment xx
Accrued interest receivable (if any) xx
Loss allowance xx
2. Amortization of loan impairment
Loss allowance xx
Interest income xx
Carrying amount of loan receivable

1. For receivable originally issued without premium or discount, its effective rate is equal to the nominal
rate.
Principal xx
Add: Accrued interest (if recorded by the company) xx
Carrying amount xx
2. For receivable originally issued with premium or discount:
Carrying amount = Present value at date of impairment plus any unpaid accrued interest recorded
by the company
REFERENCES
1. Millan, Z. V. (2022) Intermediate Accounting Volume 1A, Baguio City: Bandolin Enterprise.
2. Valix, C. and Peralta, J. (2022) Intermediate Accounting Volume 1, GIC Enterprises & Co., Inc., Manila
3. Asuncion, D. O.(2018) Applied Auditing, Real Excellence Publishing, Aurora Hill, Baguio City 2600

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SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY Accountancy Department

ACCT 1046 - Intermediate Accounting 1

Lesson 5: Notes and Loans Receivable

Topics: a. Notes Receivable

*Summary of INITIAL and SUBSEQUENT measurement of receivables

ACCT 1046- Intermediate Accounting 1 | 1

Accounting for origination costs and fees

*effective interest rate – rate used in present value computations

Formula for computing the effective interest

 Present value of loan x effective interest rate = interest income

ACCT 1046- Intermediate Accounting 1 | 3

Description PAS 39 PFRS 9

Present value of future cash flows using original

Would have been amortized Gain on impairment

P6M) Actual amortized

 Present value of expected future cash flows

Carrying amount of loan receivable

ACCT 1046- Intermediate Accounting 1 | 5

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