INTERMEDIATE ACCOUNTING 1:

CHAPTER 5: PROBLEM 6 &

CHAPTER 6: PROBLEM 5

Submitted By:

GROUP 4
Danilo Ong

John Ariel Valenzona

Rhea Mae T. Ebarat

Zachery Tristan S. Batuampar

Zainal T. Pumbayabaya

Date of Submission:

February 8, 2022
CHAPTER 5
PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Noninterest-bearing note - lump sum
On january 1, 20x1, Candle Co. received a 3-year, noninterest bearing note of 133,100 in
exchange for land with carrying amount of 100,000. The note is due on december 31, 20x3. The
effective interest rate is 10%.

Requirements:
a. Prepare the amortization table.
b. Provide all the necessary journal entries.

SOLUTIONS:

a. Amortization table

b. Journal entries
 2. Noninterest-bearing note - installments

On January 1 20x1, Stand Co. received a 3-year, noninterest-bearing note of 300,000 in

exchange for equipment with historical cost of 1,000,000 and accumulated depreciation of
700,000. The note is due in three equal annual installments of 100,000 every December 31. The
effective interest rate is 10%.

Requirements:
a. Prepare the amortization table
b. Determine the current and non-current portions of the note on December 31, 20x1
c. Determine the balance of unearned interest income (discount on note receivable) on
December 31, 20x1.
d. Provide all the necessary journal entries
e. What is the net effect of the transaction in Stand Co.’s 20x1 profit or loss?

SOLUTIONS:

a. Amortization table

b. the current and non-current portions

Current portion = 82,645

Non-current portion = 90,909

c. balance of unearned interest income

d. Journal entry

e. net effect of the transaction in Stand Co.’s 20x1 profit or loss

Interest income = 24,869

Loss on sale equipment = (51,315)

3. Noninterest-bearing note - installment in advance

On January 1, 20x1. Otters Co. received a 3-year, noninterest bearing note of P1,200,000 in
exchange for equipment with historical cost of P2,000,000 and accumulated depreciation of
P700,000. The note is due three equal annual installations beginning on January 1, 20x1 and
every January 1 thereafter. The effective interest rate is 10%

Requirements: 3.
a. Prepare the amortization table.
b. How much is the interest income in 20x1?
c. How much is the carrying amount of the receivable on Dec. 31, 20x1?
SOLUTIONS:

a. Amortization table

b. Interest income in 20x1

Interest income = 69,422

c. Carrying amount of receivable on Dec 31, 20x1

CHAPTER 6
PROBLEM 5: FOR CLASSROOM DISCUSSION
1.)ORIGINATION COSTS AND FEES
On Jan. 1, 20x1, Sore Bank extended a P5,000,000, 10% loan to a borrower. The principal
is due in 4 years’ time but interest is due annually every Dec. 31. Sore Bank incurred direct loan
origination costs of P261,986 and charged the borrower origination fee of 2%.

Requirement: Compute for the carrying amounts of the loans on Jan. 1, 20x1 and Dec.
31, 20x1, respectively.
SOLUTIONS:

2.) DAY-1 DIFFERENCE

On Jan. 1, 20x1, Chromatic Bank extended a P 2,000,000, zero-interest loan to one of
its officers. The loan matures in lump sum in 4 years’ time. The officer received loan proceeds of
P2,000,000. The effective interest rate is 10%.

Requirements: Provide the journal entry on Jan. 1, 20x1.

SOLUTIONS:
3.) IMPAIRMENT: ‘3-BUCKET’ APPROACH
On July 1, 20x1, Sunny Day Corporation recognized a 3-year, 10%, P2,000,000 loan
receivable in exchange for cash. The principal is due at maturity but interest is due annually every
July 1. The effective interest rate on the loan is 10%. Sunny Day makes the following estimates
of risks of defaults and losses.

RISK OF DEFAULT RISK OF DEFAULT LOSS THAT WOULD

IN NEXT 12 IN MONTHS 13 TO RESULT FROM
MONTHS 36 DEFAULT

7/1/20X1 2.5% 5.0% 800,000

12/31/20X1 3.0% 10.0% 700,000

12/31/20X2 1.0% 2.0% 500,000

At initial recognition, Sunny determines that the loan is not a purchased or originated
credit-impaired financial asset. On December 31, 20x1, Sunny determined that the increase in
credit risk since initial recognition is significant but the loan is not credit-impaired. (Adapted)

Requirements: Provide the entries on the following dates:

a.) July 1, 20x1
b.) December 31, 20x1
c.) December 31, 20x2
SOLUTIONS:

A.) JULY 1, 20X1

B.) DECEMBER 31, 20X1

C.) DECEMBER 31, 20X2

Sunny Day Corp. reverts back to measuring expected credit losses equal to 12-
month expected credit losses because the credit risk has significantly decreased
since initial recognition. This is evidenced by the fact that the 12-month default
risk of 1% on 12/31/20x2 is lower than the 12-month default risk of 2.5% on
7/1/20x1

4.) CREDIT-IMPAIRED FINANCIAL ASSET

On Dec. 31, 20x1, An entity determines that a P3,000,000, 10% loan receivable is credit-impaired.
A P400,000 interest receivable has been accrued on the loan The entity determines that it can
only collect a total of P3,000,000 on the loan, inclusive of both principal and interest, and that the
cash flows will be collected in installments of P1,000,000 per year. Starting Dec. 31 ,20x2. The
current market rate on Dec. 31, 20x1 is 12%

Requirement: Provide the journal entry on Dec. 31, 20x1 and compute for the interest income in
20x2

SOLUTIONS:

PV of future cash flow (1M X PV ord. ann. @10%, n=3) ₱ 2,486,852

Carrying amount on 1/1/x2 (3,400,000)

Present value of Notes Receivable (100k x 32.735537) ₱ 1,094,215

 Direct Allowance

Dec. 31,20x1 Dec. 31,20x1

Impairment loss 913,148 Impairment loss 913,148

Interest 400,000 Interest 400,000

receivable receivable

Loan 513,148 Loss 513,148

receivable receivable

Date Collections Interest Amortization Present

Income Value

2,486,852
Dec.31,

20x1

1,000,000 248,685 751,315 1,735,537

Dec.31,

20x2

1,000,000 173,554 826,446 909,091

Dec.31,

20x3

1,000,000 90,909 909,091 -

Dec.31,

20x4
5.) EVALUATION OF TRANSFERS OF FINANCIAL ASSETS
On Nov. 14, 20x1, Athena Co. sold its P30,000 loan receivable from Zevrek Co. to Devin Bank
for P28,000. The sale agreement requires Athena Co. to repurchase the loan at a future date for
P28,000 plus interest based on the current market rate on repurchase date.

Requirement: Provide the journal entry on Nov. 14, 20x1.

SOLUTIONS:

Cash 28,000

Nov. 24, 20x1 Liability on 28,000

Repurchase
Agreement

The cash received on the transfer is recorded as liability. Athena Co. is required to
repurchase the transferred loan because they don’t qualify for derecognition

6.) OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

On December 31, 20x1, Twinkle Co. has accounts receivable from, and accounts
payable to, Star, Inc. amounting to Requirement: Offsetting of financial assets and financial
liabilities from, and accounts payable to, Star, Inc. amounting to P200,000 and P180,000,
respectively. Both accounts are due currently. Twinkle Co. has the legal right of offset.
However, Because the credit term for the accounts payable is one month longer than the
accounts receivable, Twinkle Co. intends to collect first the accounts receivable and pay the
accounts payable at the end of the credit term.

Requirement: How much accounts receivable shall be presented in Twinkle's December 31,
20x1 statement of financial position?

SOLUTIONS:
Step 1
As per IFRS 32/ PAS 32, Financial Assets and Financial Liabilities can be offset only if
1. Entry has a legally enforceable right to set off &
2. Entry intends to :
 a. Either settle in a net basis
b. Realize the asset and settle the liability simultaneously.
Step 2
ANALYSIS OF PRESENT CASE: IN THE BOOKS OF TWINKLE CO.

Particulars Amount

Receivable from Star Inc. ₱ 200,000

Payable to Star Inc. ₱ 180,000

In given case, condition 1 as explained in step 1 is satisfied, i.e. Twinkle Co. has a legally
enforceable right to set off the asset and liability.

However, the second condition is not satisfied. Here, Twinkle Co. intends to collect
receivables immediately and settle the liability at the end of the credit period of the month.

Step 3

Therefore, Accounts Receivable of ₱ 200,000 shall be presented in Twinkle Co.’s Statement

of Financial Position as on December 31, 20x1 (i.e. Offsetting will not be done)

7.) RECEIVABLE FINANCING-PLEDGE

In Nov. 24, 20x1, Resume Co. borrowed a P750,000, 45-day loan from a bank and pledged its
receivables as collateral security. Resume Co. received the loan proceeds After deduction of
P27,000 advance interest.

Requirement: Provide the journal entry on Nov. 24, 20x1

SOLUTIONS:

Cash P723,000

Discount on Loans Payable 27,000

Loan Payable 750,000

8.) RECEIVABLE FINANCING-ASSIGNMENT

Morning Co. assigned 900,000 pesos accounts receivable to Sunday Financing Corp. as
security for a 750,000 pesos loan with 12% interest. Sunday charged an organization fee of 3%
based on the assigned accounts. During the first month, 350,000 pesos cash were collected on
the assigned receivables, net of 560 pesos sales returns. Morning wrote-off a 530 pesos assigned
account. The collections on the assigned receivables were applied to the principal of the loan.
Additional cash is paid for the interest accruing for the month.

Requirements: Provide Journal entries under:

a.) notification basis
b.) non-notification basis
c.) compute for Morning’s “equity in the assigned receivable” at month-end.
(ignore the amortization of the discount on loan payable.)

SOLUTIONS:

A.) NOTIFICATION BASIS B.) NON-NOTIFICATION BASIS

C.) EQUITY IN THE ASSIGNED RECEIVABLE(MONTH END)
(total accounts receivable-assigned-total loans payable)

9.) RECEIVABLE FINANCING-FACTORING

Mug Co. factored P400,000 accounts receivable with Coffee Financing Corp. Under the
arrangement, Mug was to handle disputes concerning service, and Coffee FInancing was to make
the collections and handle the sales discounts. Coffee charged 6% service fee and retained 2%
to cover sales discounts.

Requirements:
a. Prepare journal entries in Mug’s Coffee’s respective books to record the factoring
assuming the factoring was made on non-recourse basis and, as ro Mug, the transaction
is only a one-time event.
b. Prepare Journal entries in Mug’s books assuming the factoring was made on a recourse
basis and Mug uses factoring as a regular means of financing. The recourse provision
has a fair value of P7,000.

SOLUTIONS:

10.) RECEIVABLE FINANCING-DISCOUNT OF NOTES

On November 1, 20x1, Sunny Friday Co. discounted a P1,000,000, 6-month, 12% note, received
from a customer on July 1, 20x1, with a bank at 16%.
Requirement:
Provide the entry on Nov.q under each following scenarios: the discounting is made on a (a)
without recourse basis, (b) with recourse basis - conditional scale, and (c.) with recourse basis-
secured borrowing.

SOLUTIONS:

Maturity value= Principal + Interest for the full term of the note
Maturity value= 1,000,000 + (1,000,000 x 12% x 6/12)
Maturity value= 1,060,000

Discount period= unexpired term (or full term-expired term)

Discount period= 6 months - 4months from July 1 to Nov. 1
Discount period= 2 months

Discount= Maturity value x Discount rate x Discount period

Discount= 1,060,000 x 16% x 2/12
Discount= 28,267

Net proceeds= Maturity value - Discount

Net proceeds=1,060,000 - 28,267
Net proceeds= 1,031,733

Interest income= accrued interest as of date of discounting

Interest income= 1,000,000 x12% x 4/12
Interest income= 40,000