a.

The measurement of the note on initial recognition is computed as P1M x PV of an ordinary

annuity of 1 @12%, n=4.
b. No interest income shall be recognized on the note because it is noninterest-bearing.
c. The amortized cost of the note increases each year.
d. The amortized cost of the note decreases each year.

___D__8. An entity receives a three-year, P1M noninterest-bearing note that matures in three equal
annual payments due at the end of each year. The effective interest rate on the note is 12%. Which of the
following is incorrect?

a. The measurement of the note on initial recognition is computed as P1M x PV of an ordinary

annuity of 1 @12%, n=4.
b. No interest income shall be recognized on the note because it is noninterest-bearing.
c. The amortized cost of the note increases each year.
d. The amortized cost of the note decreases each year.

___D__9. A company received two one-year notes in payment for merchandise sold. One note has a face
amount of P6,000 and was interest-bearing at an annual rate of 18 percent. The other note has a face
amount of P7,080 and was non-interest-bearing (its implied interest rate was 18 percent).

a. The total amount of cash ultimately to be received will be more for the interest-bearing note.
b. Both notes will cause the same total interest to be recognized.
c. The amount of interest revenue which should be recognized is more for the interest-bearing note.
d. The amount which should be credited to sales revenue is more for the noninterest-bearing note.

___B__10. On March 1, 20x1, Nickelodeon Co. received a 12% note dated January 1, 20x1. Principal and
interest on the note are due on July 1, 20x1. On initial recognition, which of the following accounts
increased?

a. Prepaid interest
b. Interest receivable
c. Unearned interest income
d. Interest revenue
PROBEM 3: EXERCISES

1. On January 1, 20x1, Lala Bus Co. received a 4-year, noninterest bearing note of P1,000,000 in exchange
for land with carrying amount of P500,000. The note is due on December 31, 20x4. The effective
interest rate is 14%.
Requirements:
a. Prepare the amortization table.

Interest Unearned Present

Date Income interest Value PV of 1 @14%, n = 1.14^-4 =
Jan. 1, 20x1 407,920 592,080 Dec 31, 20x1 0.592080
82,891 325,029 674,971 Dec. 31, 20x2 94,496
1,000,000 * 0.592080 = 592,080
230,533 769,467 1,000,000 – 592,080 = 407,920

1,000,00
Dec. 31, 20x3 107,725
Dec. 31, 20x4 122,808 0
122,808 877,192
 Provide all the necessary journal entries.

Jan. 1, 20x1 Notes Receivable

Loss on sale of land (squeeze) (7,920)
Land
Unearned interest income
Dec. 31, 20x1 Unearned interest income
Interest Income
Dec. 31, 20x2 Unearned interest income
Interest Income
Dec. 31, 20x3 Unearned interest income
Interest Income
Dec. 31, 20x4 Unearned interest income
Interest Income
Dec. 31, 20x4 Cash
Note Receivable

2. On January 1, 20x1, Meow Co. received a 3-year, noninterest bearing note of P900,000 in exchange
for machinery with historical cost of P1,200,000 and accumulated depreciation of P400,000. The note
is due on December 31, 20x3. The effective interest rate is 12%.
Requirements:
a. Prepare the amortization table.

Interest Unearned Present PV of 1 @12%, n = 1.12^-3 =

Date Income interest Value 0.711780
Jan. 1, 20x1 259,398 640,602 Dec 31, 20x1
76,872 182,526 717,474 900,000 * 0.711780 = 640,602
Dec. 31, 20x2 86,097 96,429 803,571 900,000 – 640,602 = 259,398
Dec. 31, 20x3 96,429 900,000
Provide all the necessary journal entries.

Jan. 1, 20x1 Notes Receivable

Accumulated depreciation
Loss on sale of machinery (squeeze)

Unearned interest income

Dec. 31, 20x1 Unearned interest income
Interest Income
Dec. 31, 20x2 Unearned interest income
Interest Income
Dec. 31, 20x3 Unearned interest income
Interest Income
Dec. 31, 20x3 Cash
Note Receivable

3. On January 1, 20x1, Spidah Co. received a P1,000,000, noninterest bearing note in exchange for land
with carrying amount of P1,000,000. The note is due in four equal annual installments every December
31. The effective interest rate is 12%.
Requirements:
a. Prepare the amortization table.
 Collectio Interest Amortizatio Present
Date n Income n Value Annual installment = 1M/4 = 250,000
759,33 PV of ordinary annuity of 1 @12%, n
Jan. 1, 20x1 7 = ((1.12) ^ -4 - 1)/12% = 3.037349
250,000 600,45
250,000 * 3.037349 = 759,337
Dec 31, 20x1 91,120 158,880 8 Dec. 31, 250,000 422,51
1,000,000 – 759,337 = 240,633
20x2 72,055 177,945 3
Dec. 31, 250,000 223,21
20x3 50,702 119,298 4
b. Determine the current and non-
Dec. 31, 250,000
current portions of the note on
20x4 26,786 223,214 0
December 31, 20x1.
Collectio Interest Amortizatio Present
Date n Income n Value
759,33
Jan. 1, 20x1 7
250,000 600,45
Dec 31, 20x1 91,120 158,880 8
Dec. 31, 250,000 422,51 20x2 72,055 177,945 3
Dec. 31, 250,000 50,702 119,298 223,21
20x3 4
Dec. 31, 250,000
20x4 26,786 223,214 0

Current portion of notes receivable 177,945

Noncurrent portion of notes receivable
Carrying amount of notes receivable – Dec. 31, 20x1
_______________________________________

c. Provide all the necessary journal entries.

Jan. 1, 20x1 Notes Receivable

Loss on sale of land (squeeze)
Land
Unearned interest income

Simple Entries

Dec. 31, 20x1 Cash

Notes Receivable
Dec. 31, 20x2 Unearned interest income
Interest Income
 Compound Entries

Dec. 31, 20x2 Cash

Unearned interest income
Note Receivable
Interest Income
Dec. 31, 20x3 Cash
Unearned interest income
Note Receivable
Interest Income
Dec. 31, 20x4 Cash
Unearned interest income
Note Receivable
Interest Income

4. On January 1, 20x1, Wotah Co. received a P1,200,000, noninterest bearing note in exchange for land
with carrying amount of P1,000,000. The note is due in three equal annual installments every
December 31. The effective interest rate is 15%.
Requirements:
a. Prepare the amortization table.

Collection Interest Present Date Income Annual installment = 1.2M/3 =

400,000
Amortization Value
Jan. 1, 20x1 913,290 PV of ordinary annuity of 1 @15%, n
Dec 31, 20x1 400,000 136,994 263,006 650,284 = ((1.15) ^ -3 - 1)/15% = 2.283225
Dec. 31, 20x2 400,000 97,542 302,458 347,826
400,000 * 228.322512 = 913,290
Dec. 31, 20x3 400,000 52,174 347,826 0 1,200,000 – 913,290 = 286,710

b. Determine the current and non-current portions of the note on December 31, 20x1.
Collection Interest Present
Date Income Amortization Value
Jan. 1, 20x1 913,290
Dec 31, 20x1 400,000 136,994 263,006 650,284
Dec. 31, 20x2 400,000 97,542 302,458 347,826
Dec. 31, 20x3 400,000 52,174 347,826 0

Current portion of notes receivable 302,458

Noncurrent portion of notes receivable
Carrying amount of notes receivable – Dec. 31, 20x1
_______________________________________

c. Provide all the necessary journal entries.

Jan. 1, 20x1 Notes Receivable

Loss on sale of land (squeeze)
Land
Unearned interest income

Simple Entries
 Dec. 31, 20x1 Cash
Notes Receivable
Dec. 31, 20x2 Unearned interest income
Interest Income

Compound Entries

Dec. 31, 20x2 Cash

Unearned interest income
Note Receivable
Interest Income
Dec. 31, 20x3 Cash
Unearned interest income
Note Receivable
Interest Income

5. On January 1, 20x1, Sistah Co. sold a piece of land with carrying amount of P800,000 in exchange for
P100,000 cash and P900,000, noninterest bearing note, due in three equal annual installments of
P300,000 beginning Jan. 1, 20x1, every Jan. 1 thereafter. The effective interest rate is 9%.
Requirements:
a. Prepare the amortization table.
Annual installment = 900K/3 =
Collection Interest Present Date 300,000
Income Amortization Value
Jan. 1, 20x1 827,733 PV of an annuity due of 1 @9%, n =
(3-1) = {((1.09) ^ -2 - 1)/9%} - 1 =
Jan. 1, 20x1 300,000 - 300,000 527,733 Jan. 1, 20x2 300,000 47,496
2.759111
252,504 275,229
Jan. 1, 20x3 300,000 24,770 275,229 0 300,000 * 2.759111= 827,733
900,000 – 913,290 = 81,267
b. How much is the interest income recognized in 20x1?
As of 20x1, the interest income is 0 as shown in the table above.
c. Provide all the necessary journal entries.
Jan. 1, 20x1 Cash
Notes Receivable
Loss on sale of land (squeeze)
Land
Unearned interest income
Jan. 1, 20x1 Cash
Notes Receivable
Dec. 31, 20x1 Unearned interest income
Interest Income
Jan. 1, 20x2 Cash
Notes Receivable

6. Help the inexperienced accountant of Alaialipaw Co. reconstruct the information required in the
numbered blanks:
Face Amount (1) 1,600,000
Unearned interest at initial recognition (2) 480,728
 Effective interest rate (3) 16% Term of the note (in
years) (4) 4

Date Collections Interest income Amortization Present Value

1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
12/31/x2 400,000 (6) 143,737 256,263 (7) 642,093
12/31/x3 400,000 102,735 (8) 297,265 344,827
(9) 12/31/x4 400,000 (10) 55,173 344,828 0

7. The current and noncurrent portions of Baa-baa Co.’s note receivable at the end of the 1st year are
P213,534 and P507,015, respectively. The note is collectible in four equal annual payments of
P300,000 every Dec 31. Baa-baa Co. reported interest income of P86,466 in the 2nd year. The note was
initially recognized at P911,205 on Jan. 1 of Year 1.
Requirements:
Prepare a complete amortization table for the note above.

Date Collections Interest income Amortization Present Value

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

_______1. On Jan. 1, 20x1, Call Co. received a 10% note with face amount of P1,200,000. Both principal
and compounded interests are due on January 1, 20x4. How much interest receivable is reported on the
December 31, 20 * 2 statement of financial position?

a. 132,000
b. 120, 000
c. 168, 000
d. 252,000

_______2. Frame Co. has an 8 % note receivable dated June 30, 20x4, in the original amount of P150,000.
Payments of P50,000 in principal plus accrued interest are due annually on July 1, 20x5, 20x6, and 20x7.
In its June 30, 20x6, balance sheet, what amount should Frame report as a current asset for interest on
the note receivable?

a. 0
b. 4, 000
c. 8, 000
d. 12, 000

______3. On January 1, 20x4, Melanie Co. sold a building, which had a carrying amount of P350,000,
receiving a P125,000 down payment and, as additional consideration, a P400,000 noninterest bearing