Notes Receivable: Master Memory Table

August 12, 2026 The Rooted CPA

Summary for CPALE Review

1. THE TWO TYPES OF NOTES – INITIAL MEASUREMENT

Type of Note	Measurement Rule	Journal Entry	Why?
Short-term Notes (any kind, ≤ 1 year)	FACE AMOUNT	Dr. Notes Receivable (Face) Cr. Sales/Revenue (Face)	Discounting effect is immaterial
Long-term Interest-Bearing	FACE AMOUNT	Dr. Notes Receivable (Face) Cr. Sales/Revenue (Face)	Face = Present Value upon issuance
Long-term Noninterest-Bearing	PRESENT VALUE	Dr. Notes Receivable (Face) Cr. Sales/Revenue (PV) Cr. Unearned Interest Income (Difference)	Interest is hidden in face amount

Type of Note	Example
Short-term Notes (any kind, ≤ 1 year)	You sell a phone for ₱10,000. The buyer signs a 6-month, noninterest-bearing note for ₱10,200. Cash Price: ₱10,000 Face Amount: ₱10,200 Term: 6 months (short-term) Measurement: ₱10,200 (FACE AMOUNT) – Ignore the ₱200 difference! Journal Entry: Notes Receivable (Dr) 10,200 Sales (Cr) 10,200
Long-term Interest-Bearing	You sell land for ₱100,000. The buyer signs a 3-year, 10% note for ₱100,000. Cash Price: ₱100,000 Face Amount: ₱100,000 Stated Interest: 10% Term: 3 years Measurement: ₱100,000 (FACE AMOUNT) – The interest is charged separately! Journal Entry: Notes Receivable (Dr) 100,000 Sales (Cr) 100,000 (Every year: Dr. Cash 10,000 Cr. Interest Income 10,000)
Long-term Noninterest-Bearing	You sell machinery for its cash price of ₱100,000. The buyer signs a 3-year, noninterest-bearing note for ₱133,100 (because the hidden interest makes it grow to that amount). Amount Cash Price (PV): ₱100,000 Face Amount: ₱133,100 Term: 3 years Measurement: ₱100,000 (PRESENT VALUE) – We strip out the hidden interest! Journal Entry: Notes Receivable (Dr) 133,100 Sales ( Cr) 100,000 Unearned Interest Income (Cr) 33,100

2. THE GOLDEN RULE – Memorize This!

Condition	Initial Measurement
Short-term	FACE AMOUNT
Long-term + Interest Stated	FACE AMOUNT
Long-term + NO Interest Stated	PRESENT VALUE

3. KEY FORMULAS (Must Know!)

Formula	Computation	Example
Present Value – Lump Sum	Face Amount × PV Factor (from PV of 1 table)	You will receive ₱100,000 in 3 years. Market rate is 10%. PV Factor is 0.7513. PV = Face Amount × PV Factor PV = ₱100,000 × 0.7513 = ₱75,130 Meaning: ₱100,000 received in 3 years is worth only ₱75,130 today.
Present Value – Installment	Annual Payment × PV Factor (from PV of Annuity table)	You will receive ₱50,000 every year for 3 years. Market rate is 10%. PV Annuity Factor is 2.4869. PV = Annual Payment × PV Annuity Factor PV = ₱50,000 × 2.4869 = ₱124,345 Meaning: Three payments of ₱50,000 are worth ₱124,345 today.
Unearned Interest Income	Face Amount – Present Value	You have a ₱200,000 noninterest-bearing note. The PV is ₱150,000. Unearned Interest = Face Amount – Present Value Unearned Interest = ₱200,000 – ₱150,000 = ₱50,000 Meaning: ₱50,000 is the hidden interest you will earn over time.
Sale Price	PV of Note + Cash Received	You sell equipment. You receive ₱30,000 cash + a ₱100,000 note. The note’s PV is ₱80,000. Sale Price = PV of Note + Cash Received Sale Price = ₱80,000 + ₱30,000 = ₱110,000 Meaning: The total selling price is ₱110,000.
Gain on Sale	Sale Price – Cost of Asset	Equipment cost ₱90,000. Sale price is ₱110,000. Gain = Sale Price – Cost of Asset Gain = ₱110,000 – ₱90,000 = ₱20,000 Meaning: You earned ₱20,000 profit from the sale.
Carrying Amount	Face Amount – Unamortized Unearned Interest Income	You have a ₱200,000 note with ₱30,000 unamortized unearned interest. Carrying Amount = Face Amount – Unamortized Unearned Interest Carrying Amount = ₱200,000 – ₱30,000 = ₱170,000 Meaning: The note is worth ₱170,000 on your balance sheet today.
Monthly Interest	Principal × Rate × 1/12	You loaned ₱300,000 at 12% annual interest. Monthly Interest = Principal × Rate × 1/12 Monthly Interest = ₱300,000 × 12% × 1/12 = ₱3,000 Meaning: The borrower owes ₱3,000 in interest each month.

4. SUBSEQUENT MEASUREMENT – AMORTIZED COST

For INSTALLMENT Notes
(Noninterest-Bearing)

Annual Collection = Interest Income + Principal Payment

Interest Income = Beginning PV × Effective Rate

Principal Payment = Annual Collection – Interest Income

Ending PV = Beginning PV – Principal Payment

Important: Interest Income DECREASES over time as PV decreases.

Example: Noninterest-bearing note of ₱200,000.

PV = ₱160,000. Effective rate = 10%. Annual payment = ₱80,000.

Formula:

Interest Income = Beginning PV × 10%
Principal Payment = Annual Collection – Interest Income
Ending PV = Beginning PV – Principal Payment

Observation: Interest income DECREASES each year (₱16,000 → ₱9,600 → ₱2,560).

Year	Beginning PV	Interest Income (10%)	Principal Payment	Ending PV
1	₱160,000	₱16,000	₱64,000	₱96,000
2	₱96,000	₱9,600	₱70,400	₱25,600
3	₱25,600	₱2,560	₱77,440	₱0

For LUMP SUM Notes (Noninterest-Bearing)

Interest Income = Beginning PV × Effective Rate

Ending PV = Beginning PV + Interest Income

Unearned Interest = Previous Balance – Interest Income

Important: Interest Income INCREASES over time as PV increases.

Lump Sum Note – Interest Computation

Example: Noninterest-bearing note of ₱200,000 due in 3 years. PV = ₱150,000. Effective rate = 10%.

Year	Beginning PV	Interest Income (10%)	Ending PV
1	₱150,000	₱15,000	₱165,000
2	₱165,000	₱16,500	₱181,500
3	₱181,500	₱18,150	₱199,650

Formula:

Interest Income = Beginning PV × 10%
Ending PV = Beginning PV + Interest Income

Observation: Interest income INCREASES each year (₱15,000 → ₱16,500 → ₱18,150).

5. STATEMENT PRESENTATION

Example: You have a ₱400,000 note due in 4 equal annual installments. Unearned interest is ₱40,000.

Item	Current Portion	Noncurrent Portion
Face Amount	Amount due within 1 year P100,000	Amount due beyond 1 year P300,000
Less: Unearned Interest	Allocated portion (P10,000)	Allocated portion (P30,000)
Carrying Amount	Current Asset P90,000	Noncurrent Asset P270,000

Item	Face Amount	Unearned Interest	Carrying Amount
Current Portion	₱100,000	(₱10,000)	P90,000
Noncurrent Portion	₱300,000	(₱30,000)	P270,000
Total	₱400,000	(₱40,000)	P360,000

Meaning: This year’s payment (₱100,000) is current; the rest (₱300,000) is noncurrent.

6. INTEREST-BEARING vs. NONINTEREST-BEARING

Aspect	Interest-Bearing	Noninterest-Bearing
Interest	Stated separately	Hidden in face amount
Initial Measurement	Face Amount (PV)	Present Value
Journal Entry	Note Receivable (Face) only	Note Receivable (Face) Unearned Interest Income (Diff)
Subsequent Measurement	Principal stays flat	Carrying amount changes
Interest Income	Based on stated rate × Principal	Based on effective rate × PV

Comparison Example

	Interest-Bearing	Noninterest-Bearing
Note	3-year, ₱100,000, 10%	3-year, ₱100,000, NO stated interest
Entry	Dr. NR 100,000 Cr. Sales 100,000	Dr. NR 100,000 Cr. Sales 75,130 Cr. Unearned Int 24,870
Cash Received at Maturity	₱100,000 + ₱30,000 interest = ₱130,000	₱100,000 only (interest was already in the face amount)
Interest Recognized	Separate each year (₱10,000/year)	Amortized over 3 y

7. QUICK DECISION TREE

START: Is the note short-term (≤ 1 year)?
YES → MEASURE AT FACE AMOUNT
NO → Continue ↓

Is interest STATED on the note?
YES → MEASURE AT FACE AMOUNT (it’s the PV anyway)
NO → MEASURE AT PRESENT VALUE ↓

↓ Compute:
1. PV of future cash flows
2. Unearned Interest Income = Face - PV
3. Record sale at PV
4. Amortize Unearned Interest over time

8. COMMON PITFALLS TO AVOID

Mistake	Correct Approach
Discounting short-term notes	Use face amount
Discounting interest-bearing notes	Use face amount
Forgetting to add cash received to sale price	Sale price = PV of note + Cash received
Recording sale at face amount for noninterest-bearing	Record at PV
Recognizing all unearned interest immediately	Recognize over the term using effective interest method
Including accrued interest in note carrying amount	Accrued interest is separate

9. SAMPLE MEMORY TRICKS

“Short and interest-bearing = FACE” – No discounting needed!
“Long noninterest = DISCOUNT it!” – Must compute PV
“Unearned = Future income” – It’s revenue waiting to happen
“Effective rate × PV” – Interest income formula
“Maturity ≤ 3 months from acquisition” – Cash equivalent rule