Notes receivables

Initial measurement of notes receivable

Face value

Interest beairing
Problem 1

January 1, 2021

Carlo Company owned a tract of land costing 500,000

Land 500,000

Cash 500,000

January 1, 2022

Carlo Company sold 1,500,000 to Fernandez corporation and received 3yr note for 1,500,000 plus
interest of 10% annually.

Note receivable 1,500,000

Land 500,000

Gain on sale 1,500,000

December 31, 2022

Accrued interest receivable 150,000

Interest income 150,000

1,500,000 x 10% = 150,000

December 31, 2023

Accrued Interest receivable 165,000

Interest income 165,000

Face Value 1,500,000

1st Accrued interest 150,000

Interest rate 10%

2nd accrued interest 165,000

January 1, 2024

At the time of payment of Fernandez corporation

Cash 1,996,500

Note receivable 1,500,000

Accrued interest receivable 315,000

Interest income 181,500

Computation of accrued interest receivable

2022:1st Acrued interest (1,500,000 x 12%) 150,000

2023:2nd Acrued interest (1,650,000 x 12%) 165,000

Total 315,000

Computation of interest income

Face Value 1,500,000

Accrued interest 315,000

Total 1,815,000

3rd yr interest income (1,815,000x10%) 181,500

Cash received 1,996,500

Covid company manufactures and sells computers. On January 1, 2021, the entity sold a computer
costing 400,000 for 600,000. The buyer signed a Noninterest bearing note for 600,000 payable in three
equal installments every December 31. The cash selling price of the computer is 540,000.

January 1, 2021

Note receivable 600,000

Sales 540,000

Unearned income 60,000

Fair Value 600,000

Present Value (540,000)

Unearned income 60,000

December 31, 2021

Cash 200,000

Note receivable 200,000

Noninterest bearing amounted 600,000 and 3 equal installments

600,000 divide 3 = 200,000

1st step: fraction

2021 600,000 6/12

2022 400,000 4/12

2023 200,000 2/12

Total 1,200,000

2nd step: allocate the amount of interest income

2021 60,000 x 6/12 = 30,000

2022 60,000 x 4/12 = 20,000

2023 60,000 x 2/12 = 10,000

3rd step: Prepare journal entry

2021

Unearned interest income 30,000

Interest income 30,000

2022
unearned interest income 20,000

interest income 20,000

2023

Unearned interest income 10,000

Interest income 10,000

Gerber company is a dealer in equipment. On December 31, 2021, the entity sold an equipment in
exchange for a Noninterest bearing note requiring five annual payments of 500,000. The first payment
was made on December 31, 2022. The market interest for similar notes was 8%. The relevant present
value factors are:

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

1. How to calculate the present Value rate? Using Ordinary Calculator

Step 1:

100% + 8% = 108% or 1.08

Step 2

1.08 one click ÷ and click 5 times bakit 5 kase 5 yrs = 0.680583197 or 0.68

2. How to calculate the present value of an ordinary annuity rate?

Step 1:

0.680583197 or 0.68 minus 1 = -0.319416803

Step 2:

Click +/- removed negative sign = 0.319416803

Step 3

0.319416803 divide 8% simplied 0.08 = 3.9927100375 or 3.99

Villan company has an 8% note receivable dated June 30, 2021, in original amount of 1,500,000.
Payments of 500,000 in principal plus accrued interest are due annually on July 1, 2022, 2023 and 2024

In June 30, 2023 statement of financial position, what amount should be reported as a current asset for
interest on the note receivable?

Accrued interest receivable 80,000

Interest income 80,000

(1,000,000 x 8%)

Masipag Company is a dealer in equipment. On December 31, 2021 the entity sold an equipment in
exchange for a Noninterest bearing note requiring five annual payments of 500,000. The first payment
was made on December 31, 2022

The market interest rate for similar notes was 8%

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

1. On December 31, 2021, what is the carrying amount of note receivable?

Note receivable 2,500,000

Sales 1,995,000

Unearned interest income 505,000

2. What amount of interest income should be reported for December 31, 2022?

Unearned interest income 159,600

interest income 159,600

(1,995,000 x 8% )

3. What is the carrying amount of the note receivable on December 31, 2022?

Notes Receivable 2,500,000

Total 2,000,000

Unearned income using general ledger total (345,400)

Total carrying amount 1,654,600

4. What amount of interest income should be reported for 2023?

1,654,600 x 8% = 132,368