Southland College School of Business and Accountancy

Intermediate Accounting 1
Quiz: Notes Receivable

I. Theory of Accounts. Choose the best answer.

1. On July 01, 2022, an entity obtained a two-year 8% note receivable for services rendered. At that time, market rate of interest
was 10%. The face amount of the note and the entire amount of interest are due on June 30, 2024. Interest receivable on
December 31, 2022 is
A. 5% of the face amount of the note.
B. 4% of the face of the note.
C. 5% of the July 01, 2022 present value of amount due on June 30, 2024.
D. 4% of the July 01, 2022 present value of amount due on June 30, 2024.

2. The interest on a noninterest-bearing note is equal to

A. The excess of the face value over the present value.
B. The excess of the present value over the face value.
C. The excess of the market value over the present value.
D. Zero

3. 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. Doctrine of convenience

4. On August 15, an entity sold goods for which it received a note bearing the market rate of interest on that date. The four-
month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on
August 15, which of the following accounts increased?
A. Unearned discount
B. Interest receivable
C. Prepaid interest
D. Interest revenue

II. Short Problems. Answer the following problems and show your solutions.

Philippines Company has an 8% note receivable dated June 30, 2019, in the original amount of P6,000,000. Payments of P2,000,000
in principal plus accrued interest are due yearly on July 01, 2020, 2021, and 2022.

1. In its June 30, 2020 balance sheet, what amount should Philippines Company report as a current asset for interest on the note
receivable?

P6,000,000 – P2,000,000 = P4,000,000

P4M x 8% = P320,000

On May 01, 2021, Pakistan Corp. bought a parcel of land for P150,000. After seven months, Pakistan sold this land to a triple-A rated
company for P225,000, under the following terms: 25% at closing and a first mortgage note (at the market rate of interest) for the
balance. The first payment on the note, plus accrued interest is due December 01, 2022. Pakistan reported this sale on the installment
basis in its 2021 tax return.

2. How much gain should Pakistan report from the sale of this land in its 2021 profit or loss?

P225,000 - P150,000 = P75,000

On January 02, 2021, Panama Company sold machinery with a carrying amount of P4,800,000 in exchange for a P6,000,000
noninterest-bearing note due January 02, 2024. There was no established exchange price for the machinery. The prevailing rate of
interest for a note of this type at January 02, 2021 was 10%. Round off up to four decimal places.

3. How much should Panama Company report as interest income in its 2011 profit or loss?

600,000 x .7513 = P4,507,800 carrying value, January 02, 2021

P450,780 x 10% = P450,780

4. What is the carrying value of the note receivable as of January 01, 2022 statement of financial position?
P6,000,000 x .8264 = P4,958,400 or P4,507,800 x 1.10 = P4,958,400

Prepared by: Nixsun Diaz Casuncad, CPA SY 2022-2023

On December 31, 2021, Palau Co. received two P50,000 notes receivable from customers in exchange for services rendered. On both
notes, interest is computed on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Peru
Corp. made under customary trade terms, is due 9 months and the note from Canada Inc. is due in five years. The prevailing market
rate for similar notes on December 31, 2021 was 8% and on December 31, 2022 was 9%. Round off up to three decimal places.

5. What amount should the Peru Corp. notes receivables be reported in Palau’s December 31, 2021 balance sheet?
P50,000

6. What amount should the Canada Inc. notes receivables be reported in Palau’s December 31, 2021 balance sheet?
P50,000 + (P50,000 x 3% x 5) = P57,500
P57,500 x 0.680 = P39,100
Remember all cash inflows will occur on the maturity date, that is on December 31, 2026.

On December 31, 2021, Portugal Company sold a machine to Sweden Company in exchange for a noninterest-bearing note requiring
ten annual payments of P50,000. Sweden made the first payment on December 31, 2021. The yield rates for similar notes at date of
issuance and year-end were 8% and 10%, respectively. Round off up to two decimal places.

7. In its December 31, 2022 profit or loss, how much should be reported as interest income?
PV of OA of 1 at 8% for 9 periods
Remember, the first payment was made on the date of issuance.

P50,000 x 6.25 = P312,500

P312,500 x 8% = P25,000

8. Switzerland Company purchased from Romania Corporation a P400,000, 8%, five-year note that requires five annual year-
end installments of P100,180. The note was discounted to yield a 9% rate to Switzerland. At the date of purchase,
Switzerland recorded the note at its present value of P389,700. What is the total unearned interest revenue that will be
realized over the term of the financial instrument?

Future value = 100,180 x 5 years = P500,900

P500,900 – P389,700 = P111,200

Prepared by: Nixsun Diaz Casuncad, CPA SY 2022-2023

Southland College School of Business and Accountancy
Intermediate Accounting 1
Quiz: Loans Receivable

I. Short Problems. Choose the best answer. Answer the following problems and show your solutions.

On January 1, 2019, Alexa Steps Corp. gave a loan to Alexa Scapes Corp. amounting to P1,000,000 and received a three-year, 6%
note. The note calls for annual interest to be paid each December 31. The company incurred origination costs amounting to
_____________. The company charged P80,000 to Alexa Scapes Corp. as origination fees. As a result, the yield on the loan was 8%.

At December 31, 2020, based on Alexa Scapes’s financial crisis, Alexa Steps was not able to collect the 2020 interest and that only
P600,000 of the principal due December 31, 2021 will be collected. The P600,000 principal is expected to be collected in two equal
installments on December 31, 2021 and December 31, 2023.

1. What is the correct carrying value of the loans receivable from Alexa Scapes Corp. on December 31, 2020?

Date Cash flow PV of 1 at 8% Carrying amount

December 31, 2020 P0 x 1 = P0
December 31, 2021 300,000 x 0.9259 = P277,770
December 31, 2022 0 x 0.8573 =0
December 31, 2023 300,000 x 0.7938 = P238,140
Recoverable amount, December 31, 2020 P515,910

2. What is the impairment loss to be recognized in 2020?

Carrying amount, December 31, 2020

Loans receivable (1,060,000 /1.08) P981,481
Accrued interest receivable (1M x 6%) 60,000 1,041,481
Recoverable amount, December 31, 2020 515,910
Impairment loss P525,571

3. What is the origination cost incurred by Alexa Steps on January 1, 2019 in relation to the loans receivable?

Principal amount 1,000,000

Origination fees received (80,000)
Origination costs (squeeze) 28,426
PV of loans receivable, 01/01/2019 948,426

Principal (1,000,000 x 0.7938) 793,800

Interest (60,000 x 2.5771) 154,626
PV of loans receivable, 01/01/2019 948,426

On December 1, 2021, Halleloo Co. gave Hayee Co. a P2,000,000, 12% loan. Halleloo paid proceeds of P1,940,000 after the
deduction of a P60,000 nonrefundable loan origination fee. The principal and interest are due in sixty monthly installments of
P44,500, beginning January 1, 2022. The repayments yield an effective interest rate of 12% at a present value of P2,000,000 and
13.4% at a present value of P1,940,000.

4. What amount of interest income should be reported in 2021?

1,940,000 x 13.4% x 1/12 = P21,663

5. What amount should be reported as accrued interest receivable on December 31, 2021?

2,000,000 x 12% x 1/12 = P20,000

Oman Finance granted a 10%, 2-year P5,000,000 loan to Denmark Company on January 01, 2020. The interest is payable every
December 31 for each year during the term of the contract. Oman Finance incurred an origination cost of P328,326 but charged
Denmark Company P150,000 as origination fee. The effective rate is now 8% after considering the origination costs and origination
fee. Due to financial difficulty, Demark was unable to pay the interest on December 31, 2020. Oman Finance has now considered that
the loan to Denmark is impaired. Reliable estimate shows that the projected cash flows from the loan are as follows: P2,000,000 on
December 31, 2021 and P3,000,000 on December 31, 2022. Round off to six decimal places/

6. What amount of impairment loss on the loan should Oman Finance recognize on December 31, 2020?

Amortized cost P5,092,592

Less: present value 4,423,869

Prepared by: Nixsun Diaz Casuncad, CPA SY 2022-2023

Impairment loss P668,723

7. What amount of interest income should Oman Finance recognize on December 31, 2021?

P4,423,869 x 8% = P353,910

II. Long Problems

LP-01. Maldives Inc. granted an 8%, 3-year P6,000,000 loan to Ghana Company on January 01, 2020. The interest on the loan is
payable every December 31. Maldives incurred P520,600 of direct origination cost but an origination fee of P200,000 was
changed against Ghana Company. The effective rate on the loan as a result of the origination fee and cost is now 6%. Prepare an
amortization table and the necessary journal entries.

01/01/2020 Loans Receivable 6,000,000

Cash 6,000,000
Unearned interest income 520,600
Cash 520,600
Cash 200,000
Unearned interest income 200,000
12/31/2020 Cash 480,000
Interest income 480,000
Interest income 100,764
Unearned interest income 100,764
12/31/2021 Cash 480,000
Interest income 480,000
Interest income 106,810
Unearned interest income 106,810
12/31/2022 Cash 480,000
Interest income 480,000
Interest income 113,026
Unearned interest income 113,026
Cash 6,000,000
Loans receivable 6,000,000

Amortization Table
Date Interest Receivable Interest Income Amortization Carrying Amount
01/01/2020 - - - P6,320,600
12/31/2020 P480,000 P379,236 P100,764 6,219,836
12/31/2021 480,000 373,190 106,810 6,113,026
12/31/2022 480,000 366,974 113,026 6,000,000

Prepared by: Nixsun Diaz Casuncad, CPA SY 2022-2023