4 - Notes Receivable Problems With Solutions: From The Textbook

4 – Notes Receivable
Problems with Solutions
Problems 4-1 and 4-2 (pages 2-5)
From the textbook:
Exercises: E7-13, E7-14, E7-15*, E7-16

Problems: P7-7, P7-8, P7-9
The items in bold are the ones I recommend you do first.
* Exercise 7-15: I expanded the solution as follows:

Note 1 – Land. Wrote the journal entries for the duration of the note.
Note 2 – Services. Wrote the journal entries to December 31, 2015.
I assume that the company’s year end was December 31.

Problem 4-1
On April 1, 20x3 the Apex Company sold used equipment for proceeds of $500,000 to the
Johnson Company. The terms of payment are as follows:
• $50,000 on April 1, 20x3

• $100,000 on April 1, 20x4
• $150,000 on April 1, 20x5, and
• $200,000 on April 1, 20x6.
Interest of 2% is payable each April 1st based on the loan balance outstanding over the previous
year (i.e. interest of $450,000 x 2% = $9,000 is payable on April 1, 20x4).
The equipment was acquired by the Apex Company on January 1, 20x0 for $700,000, had an
estimated useful life of 10 years and a salvage value of $50,000. The Apex Company uses the
diminishing balance method of depreciation at a rate of 20% and has a December 31 year end.
The Apex Company’s incremental borrowing rate is 8%. Depreciation expense is recorded at the
end of the year only.
Required –
Prepare all journal entries relative to this transaction for the years 20x3 to 20x6.
Problem 4-2
On April 30, 20x5, you sell inventory having a retail value of $500,000 to one of your customers
on the following terms:
• 2% interest paid on the face value of the note at each anniversary date
• the full $500,000 is payable on April 30, 20x8
Had this been a cash sale, you would have sold the inventory for $475,000.
Required –
Prepare all journal entries relative to this transaction for the years 20x5 to 20x8. Your year-end is
December 31.
Problem 4-1
The first step is to calculate the cash flows that will be generated by this note.
April 1, 20x3 - $50,000

April 1, 20x4 - $100,000 + $9,000 of interest = $109,000
April 1, 20x5 - $150,000 + $7,000($350,000 x 2%) of interest = $157,000
April 1, 20x6 - $200,000 + $4,000($200,000 x 2%) of interest = $204,000
The next step is to discount these cash flows at April 1, 20x3 at the incremental borrowing rate
of 8%:
Present
Cash Flow of… Value
April 1, 20x3 $ 50,000
April 1, 20x4 N = 1, I = 8, FV = $109,000 100,926
April 1, 20x5 N = 2, I = 8, FV = $157,000 134,602
April 1, 20x6 N = 3, I = 8, FV = $204,000 161,942
$447,470
The net book value of the equipment sold at December 31, 20x2 is:
$700,000 x 0.803 = $358,400
Depreciation for the period Jan 1, 20x3 to April 1, 20x3 = $358,400 x 20% x 3/12
= $17,920
Net book value of the equipment on April 1, 20x3 = $358,400 – 17,920 = $340,480
Journal Entries -
Apr 1, 20x3 Depreciation expense $17,920

Accumulated Depreciation $17,920
Cash 50,000
Note receivable 397,470
Accumulated depreciation 359,520
Equipment 700,000
Gain on sale of equipment 106,990
Dec 31, 20x3 Interest receivable 23,848

Interest revenue 23,848
$397,470 x 8% x 9/12
Apr 1, 20x4 Cash 109,000
Interest receivable 23,848
Interest revenue ($397,470 x 8% x 3/12) 7,949

($397,470 - 77,203) = 320,267 x 8% x 9/12
Apr 1, 20x5 Cash 157,000

Interest revenue ($320,267 x 8% x 3/12) 6,405

($320,267 - 131,379) = 188,888 x 8% x 9/12
Apr 1, 20x6 Cash 204,000

Interest revenue ($188,888 x 8% x 3/12)* 3,779
* difference due to rounding

Problem 4-2
Imputed Rate: N = 3, PV = -475,000, PMT = 10,000, FV = 500,000

I/Y = 3.795%
Apr 30, 20x5 Note Receivable 475,000

Revenue 475,000
Dec 31, 20x5 Interest Receivable ($475,000 x 3.795% x 8/12) 12,018

Apr 30, 20x6 Cash 10,000

Interest revenue ($475,000 x 3.795% x 4/12) 6,009

Apr 30, 20x7 Cash 10,000


Apr 30, 20x8 Cash 10,000

Cash 500,000

EXERCISE 7-13 (20-25 minutes)
(a) Interest bearing note – Option 1:
September 30, 2017

Notes Receivable ...........................................................................................
105,000
Accounts Receivable.......................................................................... 105,000
December 31, 2017

Interest Receivable ........................................................................................
2,100
Interest Income .................................................................................. 2,100
($105,000 X 8% X 3/12)
September 30, 2018

Cash 113,400
Interest Receivable............................................................................. 2,100
Interest Income .................................................................................. 6,300
Notes Receivable ............................................................................... 105,000
($105,000 X 8% X 9/12 = $6,300)
(b) Non-interest bearing note – Option 2:
September 30, 2017

105,000
Accounts Receivable.......................................................................... 105,000
December 31, 2017

2,100
Interest Income .................................................................................. 2,100
($105,000 X 8% X 3/12)
September 30, 2018

6,300
Interest Income .................................................................................. 6,300
($105,000 X 8% X 9/12)
Cash 113,400
EXERCISE 7-13 (CONTINUED)
(c) There is no difference in the amount of interest income earned in 2017 and 2018
because both options bear interest at 8%. The “non-interest bearing” note has the
interest included in the face amount of the note and is journalized to account for this.
The actual interest earned is the same under both options.
(a) The liquidity of Big Corp. at December 31, 2017 will remain unchanged whichever
option is selected. Under option 1, the note balance remains at $105,000 but interest
receivable of $2,100 results in a total of $107,100 under current assets. Under Option 2,
the balance of the note, after recording the accrual of interest income is also $107,100
under current assets. The cash flows will also be the same under both options as the
amount collected at the maturity of the note is $113,400.
(a)
September 1, 2017

31,250
Sales Revenue .................................................................................... 31,250
Calculation of the present value of

the note:
Maturity value 35,000
Present value of $35,000 due
in 1 year at 12%—$35,000
X .89286 31,250
Discount $3,750
Using a financial calculator:

PV ? Yields $ (31,250)
I 12%
N 1
PMT -
FV $ 35,000
Type 0
Excel formula: =PV(rate,nper,pmt,fv,type)
(a) (continued)
December 31, 2017

1,250
Interest Income .................................................................................. 1,250
($ 31,250 X 12% X 4/12)
September 1, 2018

2,500
Interest Income .................................................................................. 2,500
($ 31,250 X 12% X 8/12)
Cash ......................................................................................................
35,000
Notes Receivable ...................................................................... 35,000
(b)
Cash ......................................................................................................
28,000
Loss on Impairment ..............................................................................
4,500
Notes Receivable
($31,250 +$1,250) ....................................................................... 32,500
($ 28,000 = $35,000 X 80%) (Note: this assumes that the entry to accrue interest for Jan –
Sept 1, 2018 has not been recorded).
(c) To decrease collection risk, Myo could have:

1. Required cash on delivery (COD) for at least a portion of the order
2. Required instalment payments (instead of one lump-sum payment in one year)
3. Applied more rigorous collection procedures, including frequent phone calls to
Khin to determine any changes in credit risk associated with the note receivable
4. Referred collection of the note receivable to an external collection agency.
(a)
1. Notes Receivable ...........................................................................................

700,000
Land ................................................................................................... 590,000
Gain on Sale of Land ......................................................................... 110,000
($700,000 – $590,000)
$1,101,460 Face value of note

.63552 Present value of 1 for 4 periods at 12%
700,000 Present value of note
1,101,460 Face value of note
$ 401,460 Discount on note receivable

PV ? yields $(699,998)
I 12%
N 4
PMT -
FV $ 1,101,460
Type 0
(a) (continued)
2. Notes Receivable ...........................................................................................

221,164
Service Revenue ................................................................................ 221,164

the note:
Maturity value 400,000
Present value of $400,000 due
in 8 years at 12%—$400,000
X .40388 $161,552
Present value of $12,000
payable annually for 8 years
at 12% annually—$12,000
X 4.96764 59,612
Present value of the note and
and interest 221,164
Discount $178,836

PV ? Yields $ (221,165)
I 12%
N 8
PMT $ 12,000
FV $ 400,000
Type 0
(a) (continued)
3.
Notes Receivable .........................................................................................
63,397
Accounts Receivable ......................................................................... 63,397

the note:
Present value of $20,000 payable annually
for 4 years at 10% annually—$20,000 X
3.16986 63,397

PV ? Yield $(63,397)
I 10%
N 4
PMT $20,000
FV -
Type 0
(b)
Effective Interest Table Instalment Note Receivable

Debit Cash Credit Interest Income Debit Carrying Amount
Credit Notes Receivable Notes Receivable of Note
$63,397
$20,000 $6,340 49,737
20,000 4,974 34,711
20,000 3,471 18,182
20,000 1,818 —
From the perspective of Agincourt, an instalment note reduces the risk of non-collection when
compared to a non-interest-bearing note. In the case of the non-interest-bearing note, the full
amount is due at the maturity of the note. The instalment note provides a regular reduction of the
principal balance in every payment received annually. This is demonstrated in the effective
interest table illustrated above for the instalment note.
(a) Notes Receivable .........................................................................................

159,438
Service Revenue ...............................................................................159,438*

PV ? Yields $ (159,439)
I 12%
N 2
PMT 0
FV $ 200,000
Type 0
* Present value of note:

PV of $200,000 due in 2 years at 12%
$200,000 X .79719 = $159,438
(b) Notes Receivable ...........................................................................................

19,133
Interest Income ..................................................................................19,133*
*$159,438 X 12% = $19,133
(c) Notes Receivable ...........................................................................................

21,429*
Interest Income...................................................................................21,429
*($159,439 + $19,133) X 12% = $21,429
Cash ............................................................................................................
200,000
Notes Receivable .............................................................................. 200,000
(d) The balance of the note at December 31, 2017 is $178,571 ($200,000 less discount
balance of $21,429). The note would be classified as a current asset on the balance sheet
as the maturity date of the note of December 31, 2018 is within the next fiscal year.
(e) 2018 & 2019 interest income would be $20,281 per year.
[($200,000 – 159,438) / 2 = $40,562 / 2 years = $20,281]
(f) Fair value of the consulting services provided can be used to value and record the
transaction, instead of fair value of the note received.
PROBLEM 7-7
(a)
October 1, 2017
150,000
Sales Revenue .................................................................................... 150,000
December 31, 2017

Interest Receivable.........................................................................................
3,750
Interest Income .................................................................................. 3,750
($150,000 X 10% X 3/12)
October 1, 2018
Cash 15,000
Interest Income .................................................................................. 11,250
($150,000 X 10% X 9/12)
December 31, 2018

3,750
Interest Income .................................................................................. 3,750
($150,000 X 10% X 3/12)
October 1, 2019
Cash 165,000
Interest Income .................................................................................. 11,250
($150,000 X 10% X 9/12 = $11,250)
PROBLEM 7-7 (CONTINUED)
(b)
October 1, 2017
150,000
Sales Revenue .................................................................................... 150,000
December 31, 2017

3,750
Interest Income .................................................................................. 3,750
($150,000 X 10% X 3/12)
January 1, 2018
Interest Income .....................................................................................
3,750
Interest Receivable .................................................................. 3,750
October 1, 2018
Cash 15,000
Interest Income .................................................................................. 15,000
December 31, 2018

3,750
Interest Income .................................................................................. 3,750
($150,000 X 10% X 3/12)
January 1, 2019
Interest Income .....................................................................................
3,750
Interest Receivable .................................................................. 3,750
October 1, 2019
Cash 165,000
Interest Income .................................................................................. 15,000
PROBLEM 7-8
(a)
Value of the note receivable:
PV ? Yields $ (55,844)
I 11%
N 4
PMT $18,000
FV 0
Type 0
Or
PV of $18,000 annuity
@ 11% for 4 years ($18,000 X 3.10245) $55,844.10
Schedule of Note Receivable Amortization

Debit, Notes Receivable /
Credit, Interest Income Present Value
Instalment of Note
Date Paid
12/31/17 — — $55,844.10
a
12/31/18 $6,142.85 $18,000.00 43,986.95b
12/31/19 4,838.56 18,000.00 30,825.51
12/31/20 3,390.81 18,000.00 16,216.32
c
12/31/21 1,783.68 18,000.00 —
a
$6,142.85 = $55,844.10 X 11%
b
$43,986.95 = $55,844.10 + $6,142.85 – $18,000.00
c
Rounded by $.12
(b)
1. December 31, 2017
Cash 36,000.00
55,844.10
Service Revenue ................................................................................ 91,844.10
To record revenue at the present value of the

note plus the immediate cash payment:
PV of $18,000 annuity
@ 11% for 4 years ($18,000 X 3.10245) $55,844.10
Down payment 36,000.00
Capitalized value of services $91,844.10

Cash 18,000.00
Notes Receivable ...............................................................................18,000.00

6,142.85
Interest Income .................................................................................. 6,142.85
Cash 18,000.00

4,838.56
Interest Income .................................................................................. 4,838.56

Cash 18,000.00

3,390.81
Interest Income .................................................................................. 3,390.81
(b) (continued)

Cash 18,000.00

1,783.68
Interest Income .................................................................................. 1,783.68
(c) From the perspective of Zhang, an instalment note reduces the risk of non-collection
when compared to a non-interest-bearing note. For a non-interest-bearing note, the full
amount is due at the maturity of the note. An instalment note provides a regular
reduction of the principal balance in every payment received annually. This is
demonstrated in the schedule of note receivable amortization. In addition, receiving cash
earlier enables it to be used for other purposes.
PROBLEM 7-9
(a) 1. Cash inflows from notes:
2017 2018 2019 2020 2021

9% Note receivable
Principal $600,000 $600,000 $600,000
Interest* 162,000 108,000 54,000
8% Note receivable
Principal 400,000
Interest 32,000 32,000 32,000
Non-interest-bearing note
receivable
Payment 200,000
Instalment contract
receivable
Down payment 60,000
Payments 45,125 45,125 45,125 45,125
6% Note receivable
Principal 200,000
Interest ______ 6,000 ______ ______ ______
$854,000 $991,125 $1,331,125 $45,125 $45,125
* 9% Note receivable interest payment calculations:

2017: $1,800,000 X 9% = $162,000
2018: ($1,800,000 - $600,000) X 9% = $108,000
2019: ($1,800,000 - $600,000 - $600,000) X 9% = $54,000
(a) (continued)
2. Interest Income reported in 2017:
Note Receivable—Sale of Division

Interest earned – 1/1 to 5/1/2017
($1,800,000 X 9% X 4/12) $ 54,000
Interest earned – 5/1 to 12/31/2017
($1,200,000 X 9% X 8/12) 72,000 $ 126,000
Note Receivable—Employees
Interest earned 1/1 to 12/31/2017
($400,000 X 8%) 32,000
Zero-interest-bearing Note—Patent
Face amount 4/1/17 $200,000
Less imputed interest
[$200,000 – ($200,000 X 0.79719)] 40,562
Balance, 4/1/2017 159,438
Interest earned to 12/31/2017
($159,438 X 12% X 9/12) 14,349
Instalment Contract—Sale of Land

Interest accrued from 7/1 to 12/31/2017
($140,000 X 11% X 6/12) 7,700
Note Receivable - Saini

Interest earned 8/1 to 12/31
($200,000 x 6% x 5/12) 5,000
Total Interest Income reported in 2017 $185,049

(a) (continued)
3. Notes and interest reported as current assets:
Current portion of notes receivable

—Sale of Division $600,000 (1)
Accrued interest on note—Sale of
Division, from 5/1 to 12/31/2017
($1,200,000 X 9% X 8/12) 72,000 672,000
Current portion of instalment contract 29,725 (3)
Accrued interest—Instalment contract 7,700 37,425
Note receivable from customer 200,000
Accrued interest—customer note 5,000 205,000
Total current notes and interest $914,425
4. Notes and interest reported as long-term investments:
Note receivable—Sale of Division $ 600,000 (1)

Note receivable—Employees 400,000
Zero-interest-bearing Note—Patent 173,787 (2)
Instalment Contract—Sale of Land 110,275 (3)
Total long-term investment $1,284,062
(b) Desrosiers Ltd.

Long-Term Receivables Section of Balance Sheet
December 31, 2017
9% note receivable from sale of division,

due in annual instalments of $600,000 to
May 1, 2019, less current instalment $600,000 (1)
8% note receivable from officer, due Dec. 31,
2019, collateralized by 10,000 shares of
Desrosiers Ltd., common shares with a
fair value of $450,000 400,000
Zero-interest-bearing note from sale of patent, net of 12%
imputed interest,
due April 1, 2019 173,787 (2)
Instalment contract receivable, due in
annual instalments of $45,125 to July 1,
2021, less current instalment 110,275 (3)
Total long-term receivables $1,284,062
(c) Desrosiers Ltd.

Selected Balance Sheet Balances
December 31, 2017
Note receivable from customer $200,000

Current portion of long-term receivables:
Note receivable from sale of division $600,000 (1)
Instalment contract receivable 29,725 (3)
Total current portion of long-term receivables $629,725
Accrued interest receivable:

Note receivable from sale of division $72,000 (4)
Instalment contract receivable 7,700
Total accrued interest receivable $84,700
(d) Desrosiers Ltd.

Interest Income from Long-Term Receivables
For the Year Ended December 31, 2017
Interest income:
Note receivable from sale of division $126,000
Note receivable from sale of patent 14,349 (2)
Note receivable from employee 32,000
Instalment contract receivable from sale of land 7,700
Total interest income for year ended 12/31/17 $185,049
(d) (continued)
Explanation of Amounts
1. Long-term Portion of 9% Note Receivable

at 12/31/2017
Face amount, 5/1/2016 $1,800,000
Less instalment received 5/1/2017 600,000
Balance, 12/31/2017 1,200,000
Less instalment due 5/1/2018 600,000
Long-term portion, 12/31/2017 $ 600,000
2. Zero-Interest-Bearing Note, Net of Imputed

Interest at 12/31/2017
Face amount 4/1/2017 $ 200,000
Less imputed interest
[$200,000 – ($200,000 X 0.79719)] 40,562
Balance, 4/1/2017 159,438
Add interest earned to 12/31/2017
($159,438 X 12% X 9/12) 14,349
Balance, 12/31/2017 $ 173,787
3. Long-term Portion of Instalment Contract

Receivable at 12/31/10
Contract selling price, 7/1/2017 $ 200,000
Less down payment, 7/1/2017 60,000
Balance, 12/31/17 140,000
Less instalment due, 7/1/2018
[$45,125 – ($140,000 X 11%)] 29,725
Long-term portion, 12/31/2017 $ 110,275
4. Accrued Interest—Note Receivable, Sale of

Division at 12/31/2017
Interest accrued from 5/1 to 12/31/2017
($1,200,000 X 9% X 8/12) $ 72,000

4 - Notes Receivable Problems With Solutions: From The Textbook

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

4 - Notes Receivable Problems With Solutions: From The Textbook

Uploaded by

Copyright:

Available Formats

4 – Notes Receivable

Problems with Solutions

Problems 4-1 and 4-2 (pages 2-5)

From the textbook:

Exercises: E7-13, E7-14, E7-15*, E7-16

The items in bold are the ones I recommend you do first.

* Exercise 7-15: I expanded the solution as follows:

• $50,000 on April 1, 20x3

April 1, 20x3 - $50,000

Apr 1, 20x3 Depreciation expense $17,920

Dec 31, 20x3 Interest receivable 23,848

Dec 31, 20x4 Interest receivable 19,216

Apr 1, 20x5 Cash 157,000

Dec 31, 20x5 Interest receivable 11,333

Apr 1, 20x6 Cash 204,000

* difference due to rounding

Imputed Rate: N = 3, PV = -475,000, PMT = 10,000, FV = 500,000

Apr 30, 20x5 Note Receivable 475,000

Dec 31, 20x5 Interest Receivable ($475,000 x 3.795% x 8/12) 12,018

Apr 30, 20x6 Cash 10,000

Dec 31, 20x6 Interest Receivable ($483,027 x 3.795% x 8/12) 12,221

Apr 30, 20x7 Cash 10,000

Dec 31, 20x7 Interest Receivable ($491,358 x 3.795% x 8/12) 12,431

Apr 30, 20x8 Cash 10,000

(a) Interest bearing note – Option 1:

September 30, 2017

December 31, 2017

September 30, 2018

(b) Non-interest bearing note – Option 2:

September 30, 2017

December 31, 2017

September 30, 2018

EXERCISE 7-14 (15-20 minutes)

Notes Receivable ...........................................................................................

Calculation of the present value of

Using a financial calculator:

December 31, 2017

Notes Receivable ...........................................................................................

Notes Receivable ...........................................................................................

(c) To decrease collection risk, Myo could have:

1. Notes Receivable ...........................................................................................

$1,101,460 Face value of note

Using a financial calculator:

2. Notes Receivable ...........................................................................................

Calculation of the present value of

Using a financial calculator:

Calculation of the present value of

Using a financial calculator:

Effective Interest Table Instalment Note Receivable

(a) Notes Receivable .........................................................................................

Using a financial calculator:

* Present value of note:

(b) Notes Receivable ...........................................................................................

(c) Notes Receivable ...........................................................................................

December 31, 2017

December 31, 2018

December 31, 2017

December 31, 2018

Schedule of Note Receivable Amortization

To record revenue at the present value of the

2. December 31, 2018

Notes Receivable ...........................................................................................

Notes Receivable ...........................................................................................