DO IT YOURSELF:

NOTES RECEIVABLE

The Notes Receivable account of MYCE Co. has a debit balance of P320, 000 on December
31, 2017. There was no balance of notes receivable at the beginning of the year. Your analysis
of the account reveals the following:

1) Notes amounting to P 925,000 were received from customers during the year.

2) Notes of P 482,000 were collected on due dates. On November 1, 180-day note amounted to
P 122,000 and 1-year note amounted to P 25,000, with both have a stated rate of 12% and
dated October 1 were discounted at the Family Bank at an interest rate of 15%. The Notes
Receivable account was credited for the notes discounted.

3) P 98, 000 of the notes discounted was paid on maturity date while note for P 24,000 was
dishonored and was charged back to Notes Receivable account.

4) Cash of P 30,000 was received as partial payment on notes not yet due. The amount
received was credited to Liability on Partial Payment account.

5) A note for P 20,000 was pledged as collateral for a bank loan.

Requirement:

1. Assuming that MYCE Co. will use a Notes Receivable Discounted account. Compute the
adjusted Notes receivable for December 31, 2017.

2. Compute for the Total Accrued Interest Receivable that will be credited in discounting of
notes.

3. What is the Carrying Amount of discounted notes receivable at the time of discounting?

SOLUTION
1. Answer: C. P 291,000

Notes Receivable Unadjusted Balance

(P 925,000- 482,000- 147,000 + 24,000) P 320,000
Partial collection (P 30,000)
Outstanding Notes Receivable discounted:
Notes Receivable discounted P 147,000
Collected at maturity (98,000)
Dishonored Notes (24,000 ) 25,000
Dishonored note ( 24,000 )

Adjusted Balance P 291,000

The cash received as partial payment for notes should be deducted in notes receivable account
because it is a payment related to notes receivable.

Since Notes Receivable- discounted account will be used, the P 147,000 discounted notes
should have -not been fully deducted on Notes Receivable account at the point of discounting,
to correct this, the notes of P 25,000 will be added back to Notes receivable account.

The amount of 24,000 dishonored should not be added back to notes receivable account. This
amount will be reflected to accounts receivable account or separate line item to other
receivables account.

The amount of note pledged serves only as collateral and will be disclosed only in the notes to
financial statement.

2. Accrued Interest Receivable:

For 180-day note (P 122,000 x 12% x 1/12) 1,220

For 1-year note (P25,000 x 12% x 1/12) 250
Total Accrued Interest Receivable 1,470
* The total Accrued Interest Receivable will be credited together with the Notes Receivable-
discounting account at the point of discounting.

3. Carrying amount of Notes Discounted:

For 180-day notes:

Principal P 122,000
Accrued Interest 1,220 123,220

For 1-year notes:

Principal P25,000
Accrued Interest Receivable 250 25,250
Total Carrying Amount P 148,470

* The total Carrying amount of notes compose of the principal plus interest