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Notes Receivable: Problem 1: True or False
Notes Receivable: Problem 1: True or False
Chapter 5
Notes Receivable
3. TRUE
4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
5. TRUE
6. FALSE 40,000 (400,000 cash price equivalent x 10%)
7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000
8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 + 9,000)
x 10% = 9,900
9. FALSE 850,000 (the note is collectible in installments)
10. TRUE
10. B
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PROBLEM 3: EXERCISES
1. Solutions:
Initial measurement:
₱1,000,000 x PV of ₱1 @14%, n= 4 = ₱592,080
Requirement (a):
Interest Unearned Present
Date income interest value
1/1/x1 407,920 592,080
12/31/x1 82,891 325,029 674,971
12/31/x2 94,496 230,533 769,467
12/31/x3 107,725 122,807 877,193
12/31/x4 122,807 0 1,000,000
Requirement (b):
1/1/x1
Note receivable 1,000,000
Unearned interest 407,920
Land 500,000
Gain 92,080
12/31/x1
Unearned interest 82,891
Interest income 82,891
12/31/x2
Unearned interest 94,496
Interest income 94,496
12/31/x3
Unearned interest 107,725
Interest income 107,725
12/31/x4
Unearned interest 122,807
Interest income 122,807
Page |3
Cash 1,000,000
Note receivable 1,000,000
2. Solutions:
Initial measurement:
₱900,000 x PV of ₱1 @12%, n= 3 = ₱640,602
Requirement (a):
Unearned
Date Interest income interest Present value
Requirement (b):
1/1/x1
Note receivable 900,000
Accum. depn. 400,000
Loss 159,398
Unearned interest 259,398
Machinery 1,200,000
12/31/x1
Unearned interest 76,872
Interest income 76,872
12/31/x2
Unearned interest 86,097
Interest income 86,097
12/31/x3
Page |4
12/31/x3
Cash 900,000
Note receivable 900,000
3. Solution:
Initial measurement:
₱250,000 x PV of ₱1 @14%, n= 4 = ₱759,337
Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 759,337
12/31/x
1 250,000 91,120 158,880 600,457
12/31/x
2 250,000 72,055 177,945 422,512
12/31/x
3 250,000 50,701 199,299 223,213
12/31/x
4 250,000 26,787 223,213 -
Requirement (b):
Current portion = 177,945 (see table above)
Noncurrent portion = 422,512 (see table above)
Requirement (c):
1/1/x1
Note receivable 1,000,000
Loss 240,663
Unearned interest (1M – 759,337) 240,663
Land 1,000,000
12/31/x1
Unearned interest 91,120
Interest income 91,120
Page |5
Cash 250,000
Note receivable 250,000
12/31/x2
Unearned interest 72,055
Interest income 72,055
Cash 250,000
Note receivable 250,000
12/31/x3
Unearned interest 50,701
Interest income 50,701
Cash 250,000
Note receivable 250,000
12/31/x4
Unearned interest 26,787
Interest income 26,787
Cash 250,000
Note receivable 250,000
4. Solution:
Initial measurement:
₱400,000 x PV of ₱1 @15%, n= 3 = ₱913,290
Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 913,290
12/31/x1 400,000 136,994 263,006 650,284
12/31/x2 400,000 97,543 302,457 347,827
12/31/x3 400,000 52,173 347,827 (0)
Page |6
Requirement (b):
Current portion = 302,457 (see table above)
Noncurrent portion = 347,827 (see table above)
Requirement (c):
1/1/x1
Note receivable 1,200,000
Loss 86,710
Unearned interest (1.2M – 913,290) 286,710
Land 1,000,000
12/31/x1
Unearned interest 136,994
Interest income 136,994
Cash 400,000
Note receivable 400,000
12/31/x2
Unearned interest 97,543
Interest income 97,543
Cash 400,000
Note receivable 400,000
12/31/x3
Unearned interest 52,173
Interest income 52,173
Cash 400,000
Note receivable 400,000
5. Solution:
Initial measurement:
(300,000 x PV of an annuity due of 1 @9%, n=3) = 827,733
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Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 827,733
1/1/x1 300,000 - 300,000 527,733
1/1/x2 300,000 47,496 252,504 275,229
1/1/x3 300,000 24,771 275,229 (0)
Requirement (b):
Interest income in 20x1 = 47,496 (see table above)
Requirement (c):
1/1/x1
Cash 100,000
Note receivable 900,000
Unearned interest (900K – 827,733) 72,267
Land 800,000
Gain 127,733
1/1/x1
Cash 300,000
Note receivable 300,000
12/31/x1
Unearned interest 47,496
Interest income 47,496
6. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Unearned interest at initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years
income n value
1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
(7)
12/31/x2 400,000 (6) 143,737 256,263 642,093
(8)
12/31/x3 400,000 102,735 297,265 344,827
(9)
12/31/x4 400,000 (10) 55,172 344,828 0
7. Solutions:
First step: Place the given information on the amortization table:
Collection Amortizatio
Date s Interest income n Present value
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000
5. C
P a g e | 10
Solution:
Initial measurement: (8M ÷ 4) x PV ordinary annuity of 1 @12%, n=4 =
6,074,699
Subsequent measurement:
Interest
Date Collections Amortization Present value
income
1/1/20x1 6,074,699
12/31/20x1 2,000,000 728,964 1,271,036 4,803,663
12/31/20x2 2,000,000 576,440 1,423,560 3,380,103
12/31/20x3 2,000,000 405,612 1,594,388 1,785,715
12/31/20x4 2,000,000 214,285 1,785,715 0
6. D Solution:
(1M ÷ 5) x PV ordinary annuity of 1 @12%, n=5 = 720,955
7. D Solution:
1/1/x1 ?
12/31/x1 ? 86,515 ? ?
12/31/x2 ? 72,896 127,104 480,366
12/31/x3 ? ? ? ?
12/31/x4 ? ? ? ?
12/31/x5 ? ? ? ?
(1)
(1M face amount ÷ 5) = 200,000
(2)
(127,104 + 480,366) = 607,470
* Effective interest rate = 72,896 int. inc. in 20x2 ÷ 607,470 = 12%
(3)
480,366 x 12% = 57,644
P a g e | 12
8. C
Solution:
Initial measurement: (1M ÷ 5) x PV of an annuity due of 1 @12%, n=
5 = 807,470
Collection Amortizatio
PV
Date s Interest income n
1/1/x
1 807,470
1/1/x
1 200,000 - 200,000 607,470
1/1/x
2 200,000 72,896 127,104 480,366
1/1/x
3 200,000 57,644 142,356 338,010
1/1/x
4 200,000 40,561 159,439 178,571
1/1/x
5 200,000 21,429 178,571 0
9. A
Solution:
Initial measurement: (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6
= 1,776,492
Subsequent measurement:
Collection Interest
Date Amortization Present value
s income
Jan. 1, 20x1 1,776,492
P a g e | 13
10. B
Solution:
Initial measurement:
PV of P1 @
Date Collections Present value
10%, n= 1 to 3
Dec. 31, 20x1 400,000 0.90909 363,636
Dec. 31, 20x2 300,000 0.82645 247,935
Dec. 31, 20x3 200,000 0.75131 150,262
Totals 900,000 761,833
Subsequent measurement:
Collection Interest Amortizatio Present
Date
s income n value
Jan. 1, 20x1 761,833
Dec. 31,
400,000 76,183 323,817 438,016
20x1
Dec. 31,
300,000 43,802 256,198 181,818
20x2
Dec. 31,
200,000 18,182 181,818 0
20x3
11. D
Initial measurement: 1,600,000 – the cash price equivalent
Subsequent measurement:
Interest Unearned Present
Date
income interest value
1/1/x1 770,470 1,600,000
12/31/x1 224,000 546,470 1,824,000
12/31/x2 255,360 291,110 2,079,360
12/31/x3 291,110 (0) 2,370,470
12. C
Solution:
Initial measurement:
Present value Present
Future cash flows factors @12%, n=3 value
3,000,00
Principal 0 0.71178 a 2,135,340
Annual interest (3M x 90,00
3%) 0 2.40183 b 216,165
Total 2,351,505
a
(PV of P1 @12%, n=3)
b
(PV of ordinary annuity of P1 @12%, n=3
Subsequent measurement:
Collectio Interes
Present
Date n of t Amortization
value
interest income
Jan. 1, 20x1 2,351,505
282,18
Dec. 31, 20x1 90,000 192,181 2,543,685
1
Dec. 31, 20x2 90,000 305,24 215,242 2,758,927
P a g e | 15
2
331,07
Dec. 31, 20x3 90,000 241,071 2,999,999
1
13. C
Solution:
Jan. 1, 20x1 1,200,000
Interest in 20x1 (1.2M x 3%) 36,000
Interest in 20x2 [(1.2M + 36K) x 3%] 37,080
Interest in 20x3 [(1.2M + 36K + 37.080K) x 3%] 38,192
Total future cash flow 1,311,272
Alternative solution:
Face amount of note receivable 1,200,000
FV of P1 @ 3%, n=3 1.092727
Future cash flow 1,311,272
14. C
Solution:
The equal annual year-end payments are computed as follows:
PV = Cash Flow x PVF
20,000 = Cash Flow x PV ordinary annuity of 1 @8%, n=5
20,000 = Cash Flow x 3.993
Cash Flow = 20,000 ÷ 3.9927
Cash Flow = 5,009
15. B
Solution:
PV of 1 @ 12%,
Cash flows
n=3; 4; & 5 PV
1/1/x1 - - -
1/1/x2 - - -
1/1/x3 - - -
1/1/x4 800,000 0.7117802478 569,424
1/1/x5 800,000 0.6355180784 508,414
1/1/x6 800,000 0.5674268557 453,941
Carrying amt. on Jan. 1, 20x1 1,531,779
ACTIVITY 1:
The learners perform the activity, grade themselves, and then pass
their scores to the teacher for recording.
ACTIVITY 2:
The learners perform the activity, grade themselves, and then pass
their scores to the teacher for recording.
ACTIVITY 3:
The learners perform the activity and then pass their printed work
to the teacher for grading.
ACTIVITY 4:
The learners perform the activity and then pass their printed work
to the teacher for grading.
P a g e | 18
Requirement (a):
Interest Unearned Present
Date income interest value
1/1/x1 33,100 100,000
12/31/x1 10,000 23,100 110,000
12/31/x2 11,000 12,100 121,000
12/31/x3 12,100 - 133,100
Requirement (b):
1/1/x1
Note receivable 133,100
Unearned interest 33,100
Land 100,000
12/31/x1
Unearned interest 10,000
Interest income 10,000
12/31/x2
Unearned interest 11,000
Interest income 11,000
12/31/x3
Unearned interest 12,100
Interest income 12,100
12/31/x3
Cash 133,100
Note receivable 133,100
P a g e | 19
2. Solutions:
Initial measurement:
₱100,000 x PV ordinary annuity of ₱1 @10%, n=3 = ₱248,685
Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 248,685
12/31/x
1 100,000 24,869 75,131 173,554
12/31/x
2 100,000 17,355 82,645 90,909
12/31/x
3 100,000 9,091 90,909 0
Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 90,909 (see table above)
Requirement (c):
Outstanding balance of face amount (100K x 2) 200,000
Carrying amt. on 12/31/x1 (173,554)
Unearned interest on 12/31/x1 26,446
OR
Unearned interest on 12/31/x1 = Interest income in 20x2 and 20x3:
(17,355 + 9,091) = 26,446
Requirement (d):
1/1/x1
Note receivable 300,000
Accum. depreciation 700,000
Loss 51,315
Unearned interest (300,000 – 248,685) 51,315
Equipment 1,000,000
P a g e | 20
12/31/x1
Unearned interest 24,869
Interest income 24,869
Cash 100,000
Note receivable 100,000
12/31/x2
Unearned interest 17,355
Interest income 17,355
Cash 100,000
Note receivable 100,000
12/31/x3
Unearned interest 9,091
Interest income 9,091
Cash 100,000
Note receivable 100,000
Requirement (e):
Interest income 24,869
Loss on sale of equipment (51,315)
Net effect on P/L - decrease (26,446)
3. Solutions:
Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215
Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 1,094,215
P a g e | 21
Requirement (b):
69,422 – see table above.
Requirement (c):
363,63
Carrying amt. on 1/1/x2
7
400,00
Add back: Collection on 1/1/x2
0
763,63
Carrying amt. on 12/31/x1
7