Page 1 of 4 | FAR Physical Handout 02

Notes Receivable, Receivable Financing and Inventories Part 1

V. GARCIA & F. CALIWAN

Notes Receivable, Receivable Financing and

Inventories Part 1
V.GARCIA & F. CALIWAN

THEORY QUESTIONS
1. For an interest-bearing note, the total amount of interest income over the note’s term is equal to
a. Annual interest multiplied by time stated as a proportion of one year.
b. Face amount multiplied by stated rate.
c. Face amount multiplied by the market rate at the start of the period.
d. Face amount multiplied by the market rate at the end of the period.

2. For a noninterest-bearing note, the total amount of interest income over the note’s term is equal to
a. Face amount less the total amount of cash flows to be received over the term of the note.
b. Face amount less the initial measurement of the promissory note.
c. Face amount multiplied by market rate at the start of the period.
d. Face amount multiplied by the market rate at the end of the period.

3. The following are correct accounting procedures for factoring of receivables, except
a. A liability is recognized whether the factoring is with or without recourse.
b. Whether casual or regular factoring, the factored receivables shall be derecognized in the books of the
entity.
c. The final settlement amount of factor’s holdback is reduced by the amounts of sales discount, allowances,
returns and uncollectible accounts.
d. All of the above are correct accounting procedures for factoring transactions.

4. The net amount of gain or loss on discounting is the difference between which of the following amounts?
a. Face amount and the proceeds from discounting.
b. Face amount and the maturity value.
c. Discount amount and accrued interest.
d. Face amount plus accrued interest and proceeds from discounting.

5. Entity A manufactures kitchen equipment, including blenders. Entity B, who operates a milk tea shop, acquired
one of these blenders. Which of the following correctly indicates the classification of the blender in the entities’
balance sheet?
a. Entity A – inventory; Entity B – inventory
b. Entity A – inventory; Entity B – property, plant and equipment
c. Entity A – property, plant and equipment; Entity B – property, plant and equipment
d. Entity A – property, plant and equipment; Entity B – inventory

6. Which of the following statements is correct with respect to inventories?

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW

(074) 665 6774 0919 093 8620 [email protected] MAY 2023 CPA REVIEW SEASON
 Page 2 of 4 | FAR Physical Handout 02

V. GARCIA & F. CALIWAN

Notes Receivable, Receivable Financing and Inventories Part 1

a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

PROBLEMS
1. On March 1, 2022, MEDIUM Company sold its land with carrying amount of P5,500,000 by receiving
P1,000,000 cash and P6,000,000 face amount promissory note that will mature on February 28, 2026. The
note bears annual interest of 10% and payable every February 28 of each year, starting in 2023.
The gain or loss on sale shall be
a. P1,500,000 loss c. P500,000 loss
b. P1,500,000 gain d. P500,000 gain
Interest income for the year 2022 shall be
a. P500,000 c. P583,333
b. P600,000 d. P700,000
Interest income for the year 2023 shall be
a. P500,000 c. P583,333
b. P600,000 d. P700,000
2. On July 1, 2022, MARGARET Company sold its land for a total price of P3,500,000. Related carrying amount
of the land is P3,000,000. The buyer paid P750,000 down payment and signed a noninterest-bearing
promissory note that will mature on June 30, 2025. Relevant market rate is 9%.
The amount of gain or loss on sale of land to be recognized during 2022 shall be
a. P500,000 gain c. P126,497 gain
b. P500,000 loss d. P126,497 loss
The amount of interest income for the year 2022 shall be
a. P95,558 c. P191,116
b. P247,500 d. P208,316
The carrying amount of the notes receivable as of December 31, 2022 shall be
a. P2,314,619 c. P2,219,062
b. P2,123,504 d. P2,418,777
3. At the beginning of 2022, ELIZABETH Company sold its building with cost of P4,500,000 and accumulated
depreciation of P2,750,000. Total selling price is P2,100,000, which is equal to the face amount of the
noninterest-bearing note issued by the buyer. The note is payable in six annual installment payments of
P350,000 to be made every December 31 of each year, starting in 2022. Average market rate on the date of
issue is 10%.
The amount of gain or loss on sale of building to be recognized during 2022 shall be
a. P225,659 gain c. P350,000 gain
b. P225,659 loss d. P350,000 loss
The amount of interest income for the year 2022 shall be
a. P178,148 c. P132,678
b. P152,434 d. P126,814

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0919 093 8620 [email protected] MAY 2023 CPA REVIEW SEASON
 Page 3 of 4 | FAR Physical Handout 02

V. GARCIA & F. CALIWAN

Notes Receivable, Receivable Financing and Inventories Part 1

The carrying amount of the notes receivable as of December 31, 2022 shall be
a. P1,099,265 c. P1,109,453
b. P1,356,193 d. P1,326,776
4. On July 1, 2022, ULYSSES Company assigned P3,000,000 of its accounts receivables to a bank. The bank
loaned 85% of the face amount of these receivables due to their high credit quality, less P40,000 service
charge. Related interest rate is 9%. The customers were informed of the assignment and were required to
pay directly to the bank. For the months of July, August and September, the bank collected 40%, 35% and
25% of the assigned accounts receivable, with no deductions (i.e., no sales discounts, returns, allowances or
bad debts). For simplicity, the collections are applied to the amount of the loan at end of each month.
The amount of net proceeds received by the Company on the date of assignment
a. P2,550,000 c. P3,000,000
b. P2,510,000 d. P2,960,000
5. On May 1, 2022, TUBER Company received a 9-month, 8% interest-bearing promissory note from its
customer. The note has a face amount of P6,000,000.
On November 1, 2022, the note was discounted with recourse to a bank at a discount rate of 10%. On maturity
date, the maker failed to pay the note, requiring the Company to pay the maturity value of the note plus protest
fee of P240,000 to the bank.
On April 30, 2023, the maker paid the Company the total amount due plus interest of 8%.
The amount of proceeds from discounting shall be
a. P6,181,000 c. P6,201,000
b. P6,032,000 d. P6,042,000
The gain or loss on discounting shall be
a. P39,000 gain c. P198,000 gain
b. P39,000 loss d. P198,000 loss
The total amount paid by the maker to the Company on April 30, 2023 shall be
a. P6,732,000 c. P6,364,800
b. P6,487,200 d. P6,120,000

6. MAROON Company initially reported an unadjusted inventory balance of P3,800,000 as of December 31,
2022. This amount is based on physical count on the same date. In addition, it also provided the following
information:
• Goods sold FOB destination on January 2, 2023 for P550,000 (costing P360,000) were received by the
customer on January 5, 2023. Related cost of freight amounted to P5,000.
• Goods purchased FOB shipping point for P340,000 were shipped by the supplier on January 3, 2023.
These goods were actually received on January 6, 2023. Related cost of freight amounted to P4,000.
• Goods purchased FOB destination for P360,000 were shipped by the supplier on December 29, 2022.
These were already received on January 4, 2023. Freight costs amounted to P3,000.
• Goods purchased FOB shipping point for P280,000 were shipped by the suppler on December 24, 2022.
These were actually received on December 29, 2022. Freight costs amounted to P2,000.
• Unsold goods held on consignment from other entities were included in the physical count at their total
selling price of P450,000, while unsold goods on the hands of consignees had total selling price of
P600,000 and cost of P480,000.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0919 093 8620 [email protected] MAY 2023 CPA REVIEW SEASON
 Page 4 of 4 | FAR Physical Handout 02

V. GARCIA & F. CALIWAN

Notes Receivable, Receivable Financing and Inventories Part 1

Based on this information, the correct amount of inventory as of December 31, 2022 shall be
a. P4,526,000 c. P4,896,000
b. P3,830,000 d. P3,690,000
7. At the beginning of February 2022, MATT Company reported beginning inventory of 18,000 units costing P10
each. Selling price is fixed at P17.50 per unit. Purchases and sales transactions during the month are
summarized as:
Date Purchases Date Sales
Feb. 6 40,000 units at P10.20 each Feb. 7 38,000 units
10 30,000 units at P10.60 each 14 22,000 units
19 36,000 units at P10.70 each 26 80,000 units
24 56,000 units at P11.00 each 27 33,000 units
28 20,000 units at P11.54 each
Assumption 1: The Company uses FIFO cost flow assumption.
The amount of ending inventory for the month shall be
a. P321,000 c. P317,400
b. P301,000 d. P307,800
The amount of gross profit for the month shall be
a. P1,197,300 c. P1,190,500
b. P1,210,500 d. P1,206,900
Assumption 2: The Company uses the average method – periodic assumption.
The amount of ending inventory for the month shall be
a. P308,864 c. P260,270
b. P300,684 d. P288,630
The amount of gross profit for the month shall be
a. P1,149,770 c. P1,198,364
b. P1,178,130 d. P1,190,184

----- END OF HANDOUTS -----

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0919 093 8620 [email protected] MAY 2023 CPA REVIEW SEASON