ADAMSON UNIVERSITY

ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
ASSIGNMENT – NOTES RECEIVABLE
A: The following selected transactions were completed by Eternal Memories Corporation during
2021:
Aug. 05 Received a 60-day 9% P12,000 promissory note from Choo Co. for merchandise
sold.
Oct. 04 Collected from Choo Co. in settlement of its note dated Aug. 5.
Oct. 10 Received a 30-day 12% P16,000 promissory note from Liverpool Corporation in
settlement of an overdue account.
Nov. 06 Received a 120-day 12% P24,000 promissory note from Vegan Co. in settlement of
an account.
Nov. 09 Liverpool Corporation dishonored its note on maturity date.
Nov. 30 Collected the amount due from Liverpool Corporation on account of its overdue
note. An additional charge for interest at 12% on maturity value from maturity date
is also collected.
Dec. 31 Year-end adjustments are made.
Prepare the journal entries of the foregoing transactions assuming Eternal Memories Corporation uses a
360-day year.

ETERNAL MEMORIES CORPORATION

Aug. 05 Received a 60-day 9% P12,000 promissory note from Choo Co. for merchandise
sold.

Aug 05 Notes Receivable 12,000

Sales 12,000
 ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Oct. 04 Collected from Choo Co. in settlement of its note dated Aug. 5.

Oct 04 Cash 12,180

Notes Receivable 12,000
Interest Income 180
12,000 X 9% X 60/360

Oct. 10 Received a 30-day 12% P16,000 promissory note from Liverpool Corporation in
settlement of an overdue account.

Oct 10 Notes Receivable 16,000

Accounts Receivable 16,000

Nov. 06 Received a 120-day 12% P24,000 promissory note from Vegan Co. in settlement of
an account.

Nov 06 Notes Receivable 24,000

Accounts Receivable 24,000

Nov. 09 Liverpool Corporation dishonored its note on maturity date.

Nov 09 Accounts Receivable 16,160

Notes Receivable 16,000
Interest Income 160
16,000 X 12% X 30/360

REMINDER: A dishonored note is classified as “Accounts Receivable”

Nov. 30 Collected the amount due from Liverpool Corporation on account of its overdue
note. An additional charge for interest at 12% on maturity value from maturity date
is also collected.
 ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Nov 30 Cash 16,273.12
Accounts Receivable 16,160.00
Interest Income 113.12
16,160 X 12% X 21/360

Dec. 31 Year-end adjustments are made.

Dec 31 Interest Receivable 440

Interest Income 440
24,000 X 12% X 55/360

This represents accrued interest on the note received from Vegan Co.

B. Aviary Corporation, engaged in raising and sale of poultry and poultry produce, owned a
hatching machine costing P2,400,000 and accumulated depreciation of P1,600,000. On July 1,
2020, the machine was sold for P1,000,000. As payment, the buyer issued a 1-year 12% note to
Aviary. Aviary operates on a calendar year.

B1. Prepare all journal entries pertinent to Aviary’s sale of the hatching machine in the year
2020.

07/01/20 Notes Receivable 1,000,000

 ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Accumulated Depreciation - Machinery 1,600,000
Machinery 2,400,000
Gain on Sale – Machinery 200,000
To record sale of the hatching machine

12/31/20 Interest Receivable 60,000

Interest Income 60,000
To record ACCRUED interest on the note (July 01 to Dec 31 2018)
P1,000,000 X 12% X 6/12

B2. What amount of Receivables should be reported by Aviary on December 31, 2020?

Notes Receivable 1,000,000

Interest Receivable 60,000
---------------
Total Receivable 1,060,000

C. Aviary Corporation, engaged in raising and sale of poultry and poultry produce, owned a
hatching machine costing P2,400,000 and accumulated depreciation of P1,600,000. On January
1, 2020, the machine was sold for P1,000,000. As payment, the buyer issued a 2-year 12% note
to Aviary. Interest on the note is compounded annually and Aviary operates on a calendar year.
Further, the entity adopts the policy of not reversing any accruals.

C1. Prepare all journal entries pertinent to Aviary’s books of accounts (from sale of the
hatching machine in the year 2020 until the note’s maturity).

01/01/20 Notes Receivable – Long Term 1,000,000

Accumulated Depreciation - Machinery 1,600,000
Machinery 2,400,000
Gain on Sale – Machinery 200,000
To record sale of the hatching machine

12/31/20 Interest Receivable 120,000

Interest Income 120,000
To record ACCRUED interest on the note (Jan 01 to Dec 31 2020)
P1,000,000 X 12%
 ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1

12/31/20 Notes Receivable – Current 1,000,000

Notes Receivable – Long Term 800,000
To reclassify the notes receivable

12/31/21 Cash 1,254,400

Notes Receivable – Current 1,000,000
Interest Receivable 120,000
Interest Income 134,400
To record maturity of the note

Face value of the note 1,000,000

ADD: Interest on the note for one year (Jan 01, 2020 to Dec 31, 2020)
P1,000,000 X 12% 120,000
----------------
Total 1,120,000
MULTIPLY: Interest rate 12%
----------------
Interest on note for another year (Jan 01, 2021 to Dec 31, 2021) 134,400

C2. What amount of Receivables should be reported by Aviary on December 31, 2020?

Notes Receivable – Current 1,000,000

Interest Receivable 120,000
---------------
Total Receivable 1,200,000

D. On January 01, 2018, Congo Retailers sold its Packaging Machine costing P700,000 with
accumulated depreciation of P350,000. As consideration, Congo received P100,000 cash and a
three-year P300,000 non-interest bearing note. The prevailing interest rate for a note of this
type is 10%.

D1. Prepare the journal entry to record the sale of the packaging equipment:
01/01/18 Cash 100,000
Notes Receivable – Long Term 300,000
Accumulated Depreciation 350,000
Loss on Sale – Packaging Equipment 24,610
Packaging Equipment 700,000
Unearned Interest Income 74,610
 ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1

Take note of the following:

 The notes receivable is collectible on a lumpsum basis, which is after three (3) years.
 The present value of 1 at 10% for three (3) periods is 0.7513. This may be computed
manually as 1 / (1 + .10) (1 + .10) (1 + .10) = 0.7513. Hence, the present value of the
note is P225,390 (P300,000 X 0.7513).
 The difference between the face value of the note (P300,000) and the present value of the
note (P225,390) is the “Unearned Interest Income” (P74,610). The “Unearned Interest
Income” is often referred to or described as the “Discount on Notes Receivable”.
 The “Loss on Sale” (P24,610) is the difference between the sale price (P100,000 Cash
PLUS P225,390 the Present Value of the note) and the book value or carrying value of
the Packaging Equipment (P700,000 MINUS P350,000)

D2. Prepare an amortization table for the Unearned Interest Income using the Effective Interest
Method.
Date Interest Income Unearned Interest (C) Present Value
(A) (B) C–B (D)
D X Rate D+B
Jan. 01, 2018 74,610 225,390
Dec. 31, 2018 22,539 52,071 247,929
Dec. 31, 2019 24,793 27,278 272,722
Dec. 31, 2020 27,278 0 300,000
------------
74,610

Note that P272,722 X 10% is only P27,272. The difference between P27,278 and P27,272 is
deficiency due to rounding.