112 Notes-Receivable-Practice-Material Intermediate Accounting 1 for first year students PDF

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Amortization of discount on note.On December 31, 201 5, Green Company finished consultation services and accepted in exchange a promissory note with a face value of €400,000, a due date of December 31, 201 8, and a stated rate of 5%, with interest receivable at the end of each year. The fair value o...

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Amortization of discount on note. On December 31, 2015, Green Company finished consultation services and accepted in exchange a promissory note with a face value of €400,000, a due date of December 31, 2018, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following interest factors are provided: Interest Rate 5% 10% 1.15763 1.33100 .86384 .75132 3.15250 3.31000 2.72325 2.48685

Table Factors For Three Periods Future Value of 1 Present Value of 1 Future Value of Ordinary Annuity of 1 Present Value of Ordinary Annuity of 1 Instructions (a) Determine the present value of the note.

(b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.) Solution (a) Present value of interest Present value of maturity value

= =

€20,000 × 2.48685 €400,000 × .75132

= =

€ 49,737 300,528 €350,265

(b) Green Company Schedule of Note Discount Amortization Effective Interest Method 5% Note Discounted at 10% (Imputed)

Date 12/31/15 12/31/16 12/31/17 12/31/18

Cash Interest (5%)

Effective Interest (10%)

€20,000 20,000 20,000 €60,000

€ 35,027 36,529 38,179* €109,735

Discount Amortized €15,027 16,529 18,179 €49,735

Unamortized Discount Balance €49,735 34,708 18,179 0

Present Value of Note €350,265 365,292 381,821 400,000

*€3 adjustment to compensate for rounding. Fair Value Option. Ellison Company sells large store-rack systems and frequently accepts notes receivable from customers as payment. Ellison conducts a thorough credit check on its customers, and it charges a fairly low interest rate (½ of 1% payable monthly) on these notes. Ellison has elected to use the fair value option for one of these notes and has the following data related to the carrying and fair value for this note. December 31, 2015 December 31, 2016

Carrying Value €88,000 72,000

Fair Value €85,000 76,000

Instructions Prepare the journal entry at December 31 (Ellison’s Year-end) for 2015, and 2016, to record the fair value option for these notes. Solution 12/31/15

12/31/16

Unrealized Holding Gain/LossIncome............................................. Notes Receivable (€88,000 – €85,000)................. Notes Receivable (€76,000 – €72,000)........................

3,000 3,000 4,000

Unrealized Holding Gain/Loss -Income...................................

4,000

71.

Which of the following statements is incorrect when a company chooses the fair value option for its receivables? a. Receivables are recorded at fair value in the statement of financial positio . c. The International Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost. d. An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue recognized but not recorded.

72.

Morley Manufacturing has notes receivable that have a fair value of $810,000 and a carrying amount of $620,000. Morley decides on December 31, 2015, to use the fair value option for these recently-acquired receivables. Which of the following statements is correct regarding the election of the fair value option by Morley? a. Morley can elect to use the fair value option or amortized cost for these notes at each statement of financial position date. b. Morley reports the receivables at fair value, with any unrealized holding gains and losses reported as a separate component of comprehensive income. d. All of the choices are correct regarding the fair value option.

73.

Under IFRS Morley Manufacturing will derecognize its receivables in all of the following cases except b. When the contractual rights to the cash flows of the receivable no longer exist; for example when one of Morley’s customers declares bankruptcy. c. When Morley collects a receivable when due. d. All of these answer choices require Morley Manufacturing to derecognize its receivables.

74.

On December 31, 2015, Hunter Corporation has elected to use the fair value option for one of its notes receivable. The note was accepted in late September, 2015 from a customer who was unable to pay its accounts receivable. The transaction with the customer had been delivery of accounting services valued at €25,000. The customer made a partial payment, resulting in a carrying value for the note of €22,000. At year-end, Hunter Corporation estimates the fair value of the note to be €17,500. Which of the following is incorrect regarding this note? a. Hunter will report the note on its statement of financial position at €17,500. €7 . c. Hunter will be required to use the fair value option for this note for the duration of its existence. d. In 2016, Hunter will calculate the unrealized holding gain or loss as the net change in the fair value of the receivable from 2015 to 2016, exclusive of interest revenue recognized but not recorded.

71. 72. 73. 74.

b c a b

117.

Lester Company received a seven-year zero-interest-bearing note on February 22, 2015, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2015, 7.5% on December 31, 2015, 7.7% on February 22, 2016, and 8% on December 31, 2016. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2015 and 2016, respectively? a. 0% and 0% c. 7% and 7.7% d. 7.5% and 8%

118.

On December 31, 2015, Flint Corporation sold for €75,000 an old machine having an original cost of €135,000 and a book value of €60,000. The terms of the sale were as follows: €15,000 down payment €30,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2015 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) € b. €67,773

c. €60,000

d. €105,546 119.

Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $800,000 to Arch Inc. Arch Inc. will pay $850,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as sales revenue? b. $765,000 c. $800,000 d. $850,000

120.

Equestrain Roads sold €50,000 of goods and accepted the customer’s €50,000 10% 1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale? a. No journal entry until cash is collected € c. Debit Accounts Receivable for €50,000 d. Debit Notes Receivable for €45,000

121.

Equestrain Roads sold €50,000 of goods and accepted the customer’s €50,000 10% 1-year note in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30? a. €0 b. €1,250 c € d. €5,000

122.

Equestrain Roads accepted a customer’s €50,000 zero-interest-bearing six-month note in a sales transaction. The product sold normally sells for €46,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31? a. €0 b. €2,000 c € d. €5,000

123.

Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $60,000 payment in two years? a. $60,000 b. $54,422 c. $54,545 d

117. 118. 119. 120. 121. 122. 123.

b a a b c c d

149.

On January 1, 2014, West Co. exchanged equipment for a $400,000 zero-interest-bearing note due on January 1, 2017. The prevailing rate of interest for a note of this type at January 1, 2014 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in West’s 2015 income statement? a. $0 b. $30,000 d. $40,000

150.

On June 1, 2015, Yang Corp. loaned Gant $300,000 on a 12% note, payable in five annual installments of $60,000 beginning January 2, 2016. In connection with this loan, Gant was required to deposit $3,000 in a zero-interest-bearing escrow account. The amount held in escrow is to be returned to Gant after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2015. Gant made timely payments through November 1, 2015. On January 2, 2016, Yang received payment of the first principal installment plus all interest due. At December 31, 2015, Yang’s interest receivable on the loan to Gant should be a. $0.

b. $3,000....