NOTES RECEIVABLES PROBLEM 6-5

On January 1, 2021, Enigma Company sold an equipment

Source: Intermediate Accounting 1 by Valix (2021 ed)
costing P500,000, which had a carrying amount of P350,000,
PROBLEM 6-1 receiving a P125,000 down payment and, as additional
consideration, a P400,000 noninterest bearing note due on
Feasible Company sold to another entity a tract of land costing January 1, 2024.
P5,000,000 for P7,000,000 on January 1, 2021.
There was no established exchange price for the equipment,
The buyer paid P1,000,000 down and signed a two-year and the note had no ready market.
promissory note for the remainder of the purchase price plus
12% interest compounded annually. The note matures on The prevailing rate of interest for a note of this type at January
January 1, 2023. 1, 2021 was 12%. The present value of 1 at 12% for three
periods is 0.7118.
Required:
Required:
Prepare journal entries for 2021, 2022, and 2023.
Prepare journal entries for 2021, 2022, 2023, and 2024.
PROBLEM 6-2
PROBLEM 6-6
Bygone Company manufactures and sells computer. On
January 1, 2021, the entity sold a computer costing P400,000 On January 1, 2021, Remarkable Company had the following
for P600,000. account balances:

The buyer signed a noninterest bearing note for P600,000 Note receivable from sale of an idle building 7,500,000
payable in three equal installments every December 31. Note receivable from an officer 2,000,000
The P7,500,000 note receivable is dated May 1, 2020, bears
The cash selling price of the computer is P540,000. interest at 9% and represents the balance of the consideration
Required: received from the sale of an idle building to Solid Company.

Prepare journal entries for the current year. Principal payments of P2,500,000 plus interest are due
annually beginning May 1, 2021. Solid Company made the first
PROBLEM 6-3 principal and interest payment on May 1, 2021.
Innovative Company manufactures and sells electrical The P2,000,000 note receivable is dated December 31, 2018,
generators. On January 1, 2021, the entity sold an electrical bears interest at 8% and is due on December 31, 2023.
generator costing P700,000 for P1,000,000.
The note is due from the president of Remarkable Company.
The buyer paid P100,000 down and signed a P900,000 Interest is payable annually on December 31 and all interest
noninterest bearing note payable in three equal installments payments were made through December 31, 2021.
every December 31.
On July 1, 2021, Remarkable Company sold a parcel of land to
The prevailing interest rate for a note of this type is 12%. The Boom Company for P4,000,000 under an installment sale
present value of an ordinary annuity of 1 for three periods is contract.
2.4018.
Boom Company made a P1,200,000 cash down payment on
Required: July 1, 2021, and signed a 4-year 10% note for the P2,800,000
balance.
Prepare journal entries for the current year.
The equal annual payments of principal and interest on the
PROBLEM 6-4
note totaled P880,000, payable on July 1 of each year from
Gullible Company is a dealer in equipment. On December 31, 2021 through 2025.
2021, the entity sold an equipment in exchange for a
The fair value of the land at the date of sale was P4,000,000
noninterest bearing note requiring five annual payments of
and the cost of the land was P3,000,000.
P500,000. The first payment was made on December 31,
2022. Required:
The market interest for similar notes was 8%. The relevant 1. Determine the amount of notes receivable including
present value factors are: accrued interest that should be classified as current
asset on December 31, 2021.
PV of 1 at 8% for 5 periods 0.68
2. Determine the amount of notes receivable that should
PV of an ordinary annuity of 1 at 8% for 5 3.99
periods be classified as noncurrent asset on December 31,
2021.

Required: PROBLEM 6-7

1. Prepare journal entries for 2021 and 2022. On June 1, 2021, Yola Company loaned Dale P500,000 on a
2. Determine the carrying amount of the note receivable 12% note payable in five annual installments of P100,000
on December 31, 2022. beginning January 1, 2022.
3. Determine the interest income for 2023.
In connection with this loan, Dale was required to deposit D 1,782,000
P5,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Dale after all PROBLEM 6-10
principal and interest payments have been made.
At the beginning of current year, Jean Company purchased
Interest on the note is payable in the first day of each month from Carmina Company a P2,000,000, 8%, five-year note that
beginning July 1, 2021. Dale made timely payments through required five equal annual year-end payments of P500,900.
November 1, 2021.
The note was discounted to yield 9% to Jean Company. At the
On January 1, 2021, Yola Company received payment of the date of purchase, Jean Company recorded the note at the
first principal installment plus all interest due. present value of P1,948,500.

On December 31, 2021, what amount should be reported as 1. What amount of total interest revenue should be
accrued interest receivable? recognized by Jean Company over the life of this
note?
A 0
B 5,000 A 504,500
C 10,000 B 556,000
D 15,000 C 800,000
D 900,000
2. What amount should be recognized as interest
PROBLEM 6-8 revenue for the current year?
Frame Company has an 8% note receivable dated June 30, A 175,365
2021, in the original amount of P1,500,000. Payments of B 160,000
P500,000 in principal plus accrued interest are due annually on C 111,200
July 1, 2022, 2023, and 2024. D 180,000
1. What is the balance of the note receivable on July 1,
2022? PROBLEM 6-11
A 1,500,000 On January 1, 2021, Mill Company sold a building and
B 1,000,000 received as consideration P1,000,000 cash and a P4,000,000
C 500,000 noninterest-bearing note due on January 1, 2024.
D 0
2. On June 30, 2028, what amount should be reported There was no established exchange price for the building and
as accrued interest receivable on the note the note had no ready market.
receivable? The prevailing rate of interest for a note of this type on January
A 120,000 1, 2021 was 10%. The present value of 1 at 10% for three
B 40,000 periods is 0.75.
C 80,000 What amount of interest revenue should be reported for 2022?
D 0
A 370,000
B 400,000
PROBLEM 6-9 C 300,000
At year-end, Jet Company received two P1,000,000 notes D 330,000
receivable from customers in exchange for services rendered.
PROBLEM 6-12
On both notes, interest is calculated on the outstanding
principal balance at the annual rate of 3% and payable at On January 1, 2021, Akin Company sold equipment with a
maturity. carrying amount of P4,800,00 in exchange for a P6,000,000
noninterest-bearing note due January 1, 2024. There was no
The note from Hart Company, made under customary trade
established exchange price for the equipment.
terms, is due in nine months and the note from Maxx Company
is due in five years. The prevailing rate of interest for a similar note was 10% and
the present value of 1 at 10% for three periods is 0.75.
The market interest rate for similar notes at year-end was 8%.
The compound interest factors to convert future value into 1. What amount should be reported as interest income
present value at 8% are: for 2021?
Present value of 1 due in 9 months 0.944 A 600,000
Present value of 1 due in 5 years 0.680 B 500,000
What total carrying amount of notes receivable should be C 400,000
reported at year-end? D 400,000
2. What amount should be reported as gain or loss on
A 1,624,000
sale of equipment for 2021?
B 1,747,200
C 1,680,000 A 1,200,000 gain
 B 2,700,000 gain C 3,000,000
C 300,000 gain D 2,322,000
D 300,000 loss 3. What amount should be recognized as interest
income for 2021?
PROBLEM 6-13 A 300,000
B 232,200
Nova Company reported the following receivables on C 261,600
December 31, 2021: D 360,000
Accounts receivable 5,100,000 4. What is the carrying amount of the note receivable on
Allowance for doubtful accounts 500,000 December 31, 2021?
Interest receivable 190,000 A 3,600,000
Notes receivable 4,000,000 B 3,000,000
C 2,277,600
 The notes receivable comprised: D 2,877,600
P1,000,000 note dates October 31, 2021, with principal
and interest payable on October 31, 2022. PROBLEM 6-15
P3,000,000 note dated March 31, 2021, with principal and
8% interest payable on March 31, 2022. Persevere Company is a dealer in equipment. On December
 During 2022, sales revenue totaled P21,000,000, 31, 2021, the entity sold an equipment in exchange for a
P18,000,000 cash was collected from customers, and noninterest-bearing note requiring five annual payments of
accounts receivable of P600,000 were written off. All sales P500,000. The first payment was made on December 31,
were made on a credit bases. 2022.
 Doubtful accounts expense was recorded at year-end by The market interest rate for similar notes was 8%.
adjusting the allowance account to an amount equal to
10% of year-end accounts receivable. PV of 1 at 8% for 5 periods 0.68
1. What amount should be reported as interest income PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
for 2021?
A 110,000 1. On December 31, 2021, what is the carrying amount
B 240,000 of note receivable?
C 60,000 A 2,500,000
D 80,000 B 1,995,000
2. What amount should be reported as doubtful C 1,700,000
accounts expense for 2021? D 1,495,000
A 750,000 2. What amount of interest income should be reported
B 850,000 for 2022?
C 600,000 A 505,000
D 100,000 B 101,000
C 159,600
PROBLEM 6-14 D 119,600
3. What is the carrying amount of the note receivable on
On January 1, 2021, Ott Company sold goods to Fox December 31, 2022?
Company. Fox Company signed a noninterest-bearing note
requiring payment of P600,000 annually for seven years. The A 1,654,600
B 2,154,600
first payment was made on January 1, 2021.
C 2,000,000
The prevailing rate of interest for this type of note at date of D 1,495,000
issuance was 10%. 4. What amount of interest income should be reported
for 2023?
PV of an ordinary annuity of 1 at 10% for 6 period 4.36
A 132,368
PV of an ordinary annuity of 1 at 10% for 7 periods 4.87 B 172,368
C 160,000
1. What amount should be recorded as sales revenue in D 200,000
January 2021?
A 3,216,000 PROBLEM 6-16
B 2,922,000
C 2,616,000 On December 31, 2021, Precious Company sold an equipment
D 2,142,000 with carrying amount of P2,000,000 and received a
2. What is the carrying amount of the note receivable on noninterest-bearing note requiring payment of P500,000
January 1, 2021? annually for ten years. The first payment is due December 31,
2022.
A 3,600,000
B 2,616,000
The prevailing rate of interest for this type of note at date of D 625,000
issuance is 12%. 4. What is the carrying amount of the note receivable on
December 31, 2022?
Present value of 1 a 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.650 A 8,000,000
B 6,750,000
C 5,250,000
1. On December 31, 2021, what is the carrying amount D 5,750,000
of the note receivable?
A 5,000,000 PROBLEM 6-18
B 2,175,000
C 1,610,000 On January 1, 2021, Allure Company sold an equipment with a
D 2,825,000 carrying amount of P800,000, receiving a noninterest bearing
2. What amount should be recognized as gain on sale of note due in three years with a face amount of P1,000,000.
equipment in 2021? There is no established market value for the equipment.
A 3,000,000 The interest rate in similar obligations is 12%. The present
B 2,175,000 value of 1 at 12% for three periods is 0.712.
C 825,000
D 0 1. What amount should be reported as gain or loss on
3. What amount of interest income should be recognized the sale of equipment on 2021?
for 2022?
A 200,000 gain
A 600,000 B 200,000 loss
B 339,000 C 88,000 gain
C 319,800 D 88,000 loss
D 300,000 2. What amount should be reported as interest income
4. What is the carrying amount of the note receivable on for 2021?
December 31, 2022?
A 288,000
A 2,325,000 B 120,000
B 4,500,000 C 96,000
C 2,825,000 D 85,440
D 2,664,000 3. What is the carrying amount of note receivable on
December 31, 2021?

PROBLEM 6-17 A 559,600

B 712,000
On December 31, 2021, Chang Company sold a machine in C 797,440
the ordinary course of business to Door Company in exchange D 800,000
for a noninterest-bearing note requiring ten annual payments 4. What amount should be reported as interest income
of P1,000,000. for 2022?
The entity made the first payment on December 31, 2021. The A 95,693
market interest rate for similar notes at the date of issuance B 96,000
was 8%. C 75,000
D 60,000
PV of an ordinary annuity of 1 at 8% for 9 periods 6.25
PV of an ordinary annuity of 1 at 8% for 10 periods 6.71
PROBLEM 6-19

1. What amount should be reported as sales revenue? 1. On October 1 of the current year, an entity received a one-
year note receivable bearing interest at the market rate.
A 7,250,000 The face amount of the note receivable and the entire
B 5,000,000
amount of the interest are due on September 30 of next
C 6,250,000
year. The interest receivable on December 31 of the
D 8,000,000
2. On December 31, 2021, what is the carrying amount current year would consist of an amount representing
of the note receivable? A Three months of accrued interest income
B Nine months of accrued interest income
A 4,500,000
C Twelve months of accrued interest income
B 4,600,000
D The excess on October 1 of the present value of the
C 6,250,000
note receivable over the face amount.
D 6,710,000
2. On July 1 of the current year, an entity obtained a two-year
3. What amount should be reported as interest income
8% note receivable for services rendered. At that time, the
for 2022?
market rate of interest was 10%. The face amount of the
A 580,000 note and the entire amount of interest are due on the date
B 720,000 of maturity. Interest receivable in December 31 of the
C 500,000 current year is
 A 5% of the face amount of the note 31 of the current year, the entity should report in the
B 4% of the face amount of the note statement of financial position
C 5% of the present value of the note
D 4% of the present value of the note A A deferred credit for interest applicable to next year
3. An entity uses the installment method to recognize revenue B No interest receivable
from installment sales. Customers pay the installment notes C Interest receivable for the entire amount of the
in 24 equal monthly amounts which include 12% interest. interest due on June 30 of next year.
D Interest receivable for the interest accruing in the
What is the carrying amount of the installment notes
current year
receivable six months after the sale?
10. An entity received a seven-year zero interest-bearing note
A 75% of the original sales price on February 1, 2021 in exchange for property sold. There
B Less than 75% of the original sales price. was no established exchange price for the property and the
C The present value of the remaining monthly note has no ready market. The prevailing rate of interest for
payments discounted at 12%. a note of this type was 7% on February 1, 2021, 6% on
D Less than the present value of the remaining monthly December 31, 2021, 8% on February 1, 2011, and 9% on
payments discounted at 12% December 31, 2022. What interest rate should be used to
4. What is imputed interest? calculate the interest revenue from the transaction for the
A Interest based on the stated interest rate years ended December 31, 2021 and 2022, respectively?
B Interest based on the implicit interest rate A 0% and 0%
C Interest based on the average interest rate B 7% and 7%
D Interest based on the bank prime interest rate C 7% and 9%
5. Accounting for the interest in a noninterest bearing note D 6% and 9%
receivable is an example of what aspect of accounting
theory?
A Relevance
B Verifiability
C Substance over form
D Form over substance
6. On July 1 of the current year, an entity received a one-year
note receivable bearing interest at the market rate. The
face amount of the note receivable and the entire amount
of the interest are due in one year. The interest receivable
account would show a balance on
A July 1 but not December 31
B December 31 but not July 1
C July 1 and December 31
D Neither July 1 nor December 31
7. On July 1 of the current year, an entity received a one-year
note receivable bearing interest at the market rate. The
face amount of the note receivable and the entire amount
of the interest are due in one year. When the note
receivable was recorded on July 1, which of the following
was debited?
A Interest receivable
B Unearned discount on note receivable
C Interest receivable and unearned discount on note
receivable
D Neither interest receivable nor unearned discount on
note receivable
8. On August 15, an entity sold goods for which it received a
note bearing the market rate of interest in that date. The
four-month note was dated July 15. Note principal, together
with all interest, is due November 15. When the note was
recorded on August 15, which of the following accounts
increased?
A Unearned discount
B Interest receivable
C Prepaid interest
D Interest revenue
9. On July 1 of the current year, an entity received a one-year
note receivable bearing interest at the market rate. The
face mount of the note receivable and the entire amount of
the interest are due on June 30 of next year. On December