4 : Notes Receivable - Non interest bearing note , First installment due immediately

The video introduces the concept of non-interest-bearing notes with equal annual installments, where the first installment is due immediately. It presents a sample problem involving the sale of land for a 3 million pesos non-interest-bearing note, collectible in three equal annual installments starting January 1, 20X1. The prevailing interest rate for this type of note is 12%. The key characteristics discussed are the absence of a stated interest rate, with interest being implied and already included in the 3 million pesos note. The installment collection is in three equal annual payments of 1 million pesos each. The immediate first installment is crucial as it dictates the formula used for present value calculation.

To determine the present value of the note, the annuity due formula is used because the installments are equal and the first payment is due immediately. The annual installment is 1 million pesos (3 million pesos / 3 years). The formula for the present value of an annuity due factor is explained: (1 - (1 + interest rate)^(-n + 1)) / interest rate + 1. Using the 12% market rate, the calculation is detailed: (1 - 1.12^(-3 + 1)) / 0.12 + 1, which simplifies to (1 - 1.12^-2) / 0.12 + 1. The calculated present value factor is 2.690051. Multiplying this by the annual installment of 1 million pesos yields a present value of 2,690,051 pesos.

An amortization table is constructed to track the present value, interest income, and principal reduction over time. Starting with the initial present value of 2,690,051 pesos on January 1, 20X1, the first 1 million pesos installment is immediately deducted, reducing the present value to 1,690,051 pesos. No interest income is recognized at this initial point since no time has passed. For each subsequent year, interest income is calculated by multiplying the updated present value by the 12% effective rate. The difference between the 1 million pesos annual installment and the interest income is the amortization (principal reduction). The table demonstrates how the present value gradually decreases to zero by the end of the term on January 1, 20X3.

The video outlines the necessary journal entries. On January 1, 20X1, the initial entry debits Notes Receivable for 3 million pesos (face amount) and credits Land for its historical cost of 2.5 million pesos. The unearned interest income, which is the difference between the face amount and the present value (3,000,000 - 2,690,051 = 309,949 pesos), is credited. A Gain on Sale of Land of 190,051 pesos is recognized, balancing the entry. Immediately after, the first installment is recorded by debiting Cash and crediting Notes Receivable for 1 million pesos. On December 31, 20X1, an adjusting entry debits Unearned Interest Income and credits Interest Income for 202,806 pesos to recognize the earned interest. Similar entries are made for January 1, 20X2 (second installment), December 31, 20X2 (interest recognition), and January 1, 20X3 (final installment).

The video concludes by emphasizing the importance of identifying when the first installment is due. If it's due immediately, the annuity due formula is used. If it's due one year from now, the ordinary annuity formula would be applied. This distinction significantly impacts the calculation of the present value, the amortization schedule, and consequently, the journal entries. Understanding the timing of the first collection is critical for accurate financial reporting of non-interest-bearing notes.