INTERMEDIATE ACCOUNTING 1

NOTE RECEIVABLE
PROBLEM SOLVING

PROBLEM 1
On June 1, 2021, Yola Company loaned Dales P500,000 on a 12% note, payable in five annual installments of P100,000
beginning January 1, 2022. In connection with this loan, Dale was required to deposit P5,000 in a non-interest bearing escrow
account. The amount held in escrow is to be returned to Dale after all principal and interest payments hav been made.
Interest on the note is payable on the first day of each month beginning July 1, 2021. Dale made timely payments through
November 2021. On January 1, 2022, Yola received payment of the first principal installment plus all interest due. On
December 31, 2021, what amount should be reported as accrued interest receivable?
November 1-30 (500,000*1%) 5,000.00
December 1-31 (500,000*1%) 5,000.00
Accrued Interest Receivable on December 31, 2021 10,000.00
***1% interest per month because the annual rate is 12%

PROBLEM 2
Frame Company has an 8% note receivable dated June 30, 2021, in the original amount of P1,500,000. Payments of
P500,000 in principal plus interest are due annually on July 1, 2022, 2023 and 2024.
1. What is the balance of note receivable on July 1, 2022?
Note Receivable, June 30, 2021 1,500,000.00
Payment on July 1, 2022 - 500,000.00
Note Receivable, July 1, 2022 1,000,000.00
2. On June 30, 2023, what amount should be reported as accrued interest on the note receivable?
Accrued interest receivable - June 30, 2023 80,000.00
(1,000,000 * 8%)
***Since the next payment is July 1, 2023, the accrued interest is for one year from July 1, 2022 to June 30, 2023

PROBLEM 3
Nova company reported the following information on December 31, 2021:
Accounts Receivable 5,100,000.00
Allowance for doubtful accounts 500,000.00
Accrued interest receivable 190,000.00
Note Receivable 4,000,000.00
Additional Information:
*The notes receivable is comprised of:
-P1,000,000 note dated October 31, 2021, with principal and 6% interest payable on October 31, 2022
-P3,000,000 note dated March 31, 2021 with principal and 8% interest payable on March 31, 2022
*During 2022, sales revenue totaled P21,000,000, P18,000,000 cash was collected from customers, and P600,000 in accounts
receivable were written off. All sales are made on a credit basis.
*Doubtful accounts expense is recorded at year-end by adjusting the allowance account to an equal to 10% of year-end
Accounts Receivable
 1. What amount should be reported as interest income for 2022?
Interest Income January 1-October 31, 2022 (P1,000,000*6%*10/12) 50,000.00
Interest Income January 1-March 31, 2022 (P3,000,000*8%*3/12) 60,000.00
Total interest revenue 110,000.00

PROBLEM 4
On January 1, 2021, Ott company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring payment of
P600,000 annually for seven years. The first payment was made on January 1, 2021. The prevailing rate of interest for this type
note at date of issuance was 10%.
PV of an ordinary annuity of 1 at 10% for 6 periods 4.36
PV of an ordinary annuity of 1 at 10% for 7 periods 4.87
1. What amount should be recorded as sales revenue in January 2021?
First payment on January 1, 2021 600,000.00
Present value of remaining six payments (600k*4.36) 2,616,000.00
Correct sales revenue 3,216,000.00

2. What is the carrying amount of the note receivable on January 1, 2021?

Annual cash inflows 600,000.00
Multiplied by: Present value factor 4.36
Carrying amount of Note Receivable 2,616,000.00

3. What amount should be recognized as interest income for 2021?

Interest Income for 2021 (2,616,000*10%) 261,600.00

4. What is the carrying amount of the note receivable on December 31, 2021?
Date Face Value Interest Income Unearned Int. Income Carrying Amount
January 1, 2021 3,600,000.00 - 984,000.00 2,616,000.00
December 31, 2021 3,600,000.00 261,600.00 722,400.00 2,877,600.00

PROBLEM 5
On December 31, 2021, Park company sold used equipment with carrying amount of P2,000,000 in exchange for a non-interest bearing note of
P5,000,000 requiring ten annual payments of P500,000. The first payment was made on December 31, 2022. The market interest for similar note was 12%.
The present value of an ordinary annuity of 1 at 12% is 5.65 for 10 periods, 5.33 for 9 periods.
1. What is the carrying amount of the note receivable on December 31, 2021?
Present value of note (500,000*5.65) 2,825,000.00
***The note receivable is reported at present value on December 31, 2021

2. What amount should be recognized as gain on sale of equipment in 2021?

Sales price - equal to present value 2,825,000.00
Carrying amount of equipment - 2,000,000.00
Gain on sale of equipment 825,000.00
 3. What amount should be recognized as interest income for 2022?
Interest income for 2022 (2,825,000*12%) 339,000.00

4. What is the balance of unearned interest income of December 31, 2021?

Face amount of the note 5,000,000.00
Present value of note (500,000*5.65) - 2,825,000.00
Unearned interest income 2,175,000.00

5. What is the carrying amount of the note receivable on December 31, 2022?
Date Principal Collection Remaining Balance Interest Income Unearned Int. Income Carrying Amount
December 31, 2021 5,000,000.00 5,000,000.00 - 2,175,000.00 2,825,000.00
December 31, 2022 5,000,000.00 500,000.00 4,500,000.00 339,000.00 1,836,000.00 2,664,000.00

PROBLEM 6
On December 31, 2021, Chang Company sold a machine in the ordinary course of business to Door Company in exchange for a noninterest bearing note
requiring ten annual payments of P1,000,000. The entity made the first payment on December 31, 2021. The market interest rate for similar notes at date of
issuance was 8%.
PV of an ordinary annuity of 1 at 8% for 9 periods 6.25
PV of an ordinary annuity of 1 at 8% for 10 periods 6.71
1. What amount should be recognized as sales revenue?
First payment on December 31, 2021 1,000,000.00
Present value of cash flows for 9 periods at 8% (1,000,000*6.25) 6,250,000.00
Sales revenue 7,250,000.00

2. On December 31, 2021, what is the carrying amount of the note receivable?
Present value of cash flows for 9 periods at 8% (1,000,000*6.25) 6,250,000.00
***The note receivable is reported at present value on December 31, 2021

3. What should be reported as interest income for 2022?

Interest income for 2022 (6,250,000*8%) 500,000.00

4. What is the carrying amount of the note receivable on December 31, 2022?
Date Principal Collection Remaining Balance Interest Income Unearned Int. Income Carrying Amount
December 31, 2021 10,000,000.00 1,000,000.00 9,000,000.00 - 2,750,000.00 6,250,000.00
December 31, 2022 9,000,000.00 1,000,000.00 8,000,000.00 500,000.00 2,250,000.00 5,750,000.00
 PROBLEM 7
On December 31, 2021, Chang Company sold a machine in the ordinary course of business to Door Company in exchange for a noninterest bearing note
requiring ten annual payments of P1,000,000. The entity made the first payment on December 31, 2022. The market interest rate for similar notes at date of
issuance was 8%.
PV of an ordinary annuity of 1 at 8% for 9 periods 6.25
PV of an ordinary annuity of 1 at 8% for 10 periods 6.71
1. What amount should be recognized as sales revenue?
Present value of cash flows for 10 periods at 8% (1,000,000*6.71) 6,710,000.00
Sales revenue 6,710,000.00

2. On December 31, 2021, what is the carrying amount of the note receivable?
Present value of cash flows for 9 periods at 8% (1,000,000*6.71) 6,710,000.00
***The note receivable is reported at present value on December 31, 2021

3. What should be reported as interest income for 2022?

Interest income for 2022 (6,710,000*8%) 536,800.00

4. What is the carrying amount of the note receivable on December 31, 2022?
Date Principal Collection Remaining Balance Interest Income Unearned Int. Income Carrying Amount
December 31, 2021 10,000,000.00 - 10,000,000.00 - 3,290,000.00 6,710,000.00
December 31, 2022 10,000,000.00 1,000,000.00 9,000,000.00 536,800.00 2,753,200.00 6,246,800.00

PROBLEM 8
On January 1, 2021, Emme Company sold equipment with a carrying amount of P4,800,000 in exchange for a P6,000,000 noninterest bearing note due
January 1, 2024. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 1, 2021 was 10%.
The present value of 1 at 10% for three periods is 0.75.
1. What amount should be reported as interest income for 2021?
Date Principal Collection Remaining Balance Interest Income Unearned Int. Income Carrying Amount
January 1, 2021 6,000,000.00 - 6,000,000.00 - 1,500,000.00 4,500,000.00
December 31, 2022 6,000,000.00 - 6,000,000.00 450,000.00 1,050,000.00 4,950,000.00

2. What should be reported as gain or loss on sale of equipment?

Present value of note (correct sale price) (6,000,000*.75) 4,500,000.00
Carrying amount of equipment - 4,800,000.00
Loss on sale of equipment - 300,000.00

Reference: Practical financial accounting 1: By Conrado T. Valix, Christian Aris M. Valix