Reviewer in NOTES RECEIVABLE

On January 1, 2019, an entity sold equipment with a carrying amount of P4,800,000 in exchange for
P6,000,000 noninterest bearing note due January 1, 2022. There was no established exchange price for
the equipment. The prevailing interest rate for this note was 10%. The present value of 1 at 10% for
three periods is 0.75.

1. What amount should be reported as gain or loss on sale of equipment in 2019?

a.1,200,000 gain

b.2,700,000 gain

c.300,000 gain

d. 300,000 loss

2. What amount should be reported as interest income for 2019?

a. 600,000

b. 500,000

c. 450,000

d. 400,000

3. What amount should be reported as interest income for 2020?

a. 480,000

b. 495,000

c. 528,000

d. 500,000

4. How much is the net income of the company for the year 2019?
a. 450,000

b. 750,000

c. 200,000

d. 150,000

On December 31, 2019, an entity sold equipment with carrying amount of P2,000,000 in exchange for a
noninterest bearing note of P5,000,000 requiring ten annual payments of P500,000. The first payment
was made on December 31, 2020. The market interest for similar note was 12%. The present value of an
ordinary annuity of 1 is 5.65 for ten periods and 5.33 for nine periods.

5. What is the carrying amount of the note receivable on December 31, 2019?

a. 5,000,000

b. 2,825,000

c. 2,665,000

d. 4,500,000

6. What is the gain on sale of equipment to be recognized in 2019?

a. 3,000,000

b. 2,175,000

c. 825,000

d. 0

7. What amount should be recognized as interest income for 2020?

a. 600,000

b. 339,000

c. 319,800

d. 261,000
8. What is the carrying amount of the note receivable on December 31, 2020?

a. 2,664,000

b. 4,500,000

c. 3,164,000

d. 2,644,800

9. Jean Company purchased from Carmina Company a P2,000,000 8% five year note that required five
equal annual year-end payments of P500,900. The note was discounted to yield a 9% rate to Jean
company. At the date of purchase, Jean Company recorded the note at the present value of P1,948,500.
What is the total interest revenue carried by Jean Company over the life of this note?

a. 504,500

b. 556,000

c. 800,000

d. 900,000

Pangasinan Company is a dealer in equipment. On December 31, 2020, the entity sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500,000. The first payment
was made on December 31, 2020. The market interest for similar notes was 8%. The PV of 1 at 8% for 5
periods is .68, and the PV of an ordinary annuity of 1 at 8% for 5 periods is 3.99.

10. On December 31, 2020, what is the carrying amount of the note receivable?

a. 2,500,000

b. 1,995,000

c. 1,700,000
d. 2,155,000

12. What interest income should be reported for 2021?

a. 198,600

b. 101,000

c. 159,600

d. 119,600

13. What is the carrying amount of the note receivable on December 31, 2021?

a. 1,654,600

b. 2,000,000

c. 2,154,600

d. 1,287,400

14. On June 30, 2020, Green Company accepted a customer's P2,500,000 noninterest-bearing one-year
note in a sale transaction. The product sold normally sells for P2,300,000. What amount should be
reported as interest revenue for the year end December 31, 2020?

a. 200,000

b. 100,000

c. 250,000

d. 0

b. Interest based on the implicit interest rate

c. Interest based on the average interest rate

d. Interest based on the bank prime interest rate

15. Accounting for the interest in a noninterest bearing note receivable is an example of what aspect of
accounting theory?

a. Matching

b. Verifiability

c. Substance over form

d. Form over substance

16. On October 1 of the current year, an entity received a one-year interest bearing note receivable. The
face amount of the note receivable and the entire amount of the interest are due on September 30 of
next year. The unearned interest income on December 31 of the current year would consist of an
amount representing

a. Three months of interest income

b. Nine months of unearned interest income

c. Twelve months of unearned interest income

d. None

17. On July 1 of the current year, an entity obtained a two-year 8% note receivable for services
rendered. At that time, the market rate of interest was 10%. The face amount of the note and the entire
amount of interest are due on the date of maturity. Interest receivable on December 31 of the current
year is

a. 5% of the face amount of the note

b. 4% of the face amount of the note

c. 5% of the present value of the note

d, 4% of the present value of the note

18. An entity uses the installment sales method to recognize revenue. Customers pay the installment
notes in 24 equal monthly amounts which include 12% interest. What is the installment notes receivable
balance six months after the sale?

a. 75% of the original sales price.

b. Less than 75% of the original sales price.

c. The present value of the remaining monthly payments discounted at 12%.

d. Less than the present value of the remaining monthly

payments discounted at 12%.

19.What is imputed interest?

a.Interest based on the stated interest rate

b.Interest based on the implicit interest rate

c.Interest based on the average interest rate

d.Interest based on the bank prime interest rate

20. 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

21. 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?

I. Interest receivable

II. Unearned interest on note receivable

a. I only

b. Both I and II

c. Neither I nor II

d. II only

22. 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 on
June 30 of next year. On December 31 of the current year, the entity should report in the statement of
financial position

a A deferred credit for interest applicable to next year

b. No interest receivable

c. Interest receivable for the entire amount of the interest due on June 30 of next year

d. Interest receivable for the interest accruing in the current year

23. An entity received a seven-year zero interest-bearing note on February 1, 2013 in exchange for
property sold. There was no established exchange price for the property and the note has no ready
market. The prevailing rate of interest for a note of this type was 7% on February 1, 2013, 6% on
December 31, 2013, 8% on February 1, 2014, and 9% on December 31, 2014. What interest rate should
be used to calculate the interest revenue from the transaction for the years ended December 31, 2013
and 2014, respectively?

a. 0% and 0%

b. 7% and 7%

c. 7% and 9%

d. 6% and 9%