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NOTES RECEIVABLESEasy: Dale Company purchased a P20,000, 8%, five-year note that required five equal annual year-end payments of P5,009. The note was discounted to yield a 9%. At that date of purchase, the entity recorded the note at its present value of P19,485. The entity does not elect the fair v...

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NOTES RECEIVABLES Easy: 1. Dale Company purchased a P20,000, 8%, five-year note that required five equal annual year-end payments of P5,009. The note was discounted to yield a 9%. At that date of purchase, the entity recorded the note at its present value of P19,485. The entity does not elect the fair value option. What is the total interest revenue earned over the life of this note? a. b. c. d.

8,000 5,045 9,000 5,560

2. Alfred sold P50,000 of goods and accepted the customer's P50,000 10% 1-year note payable 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. b. c. d.

0 2,500 1,250 5,000

SOLUTION: P50,000 × .10 × 6/12 = P2,500. 3. Subsequent to initial recognition, loans and receivables are measured at a. b. c. d.

Fair value Cost Amortized cost using straight line method Amortized cost using effective interest method

4. Alfred sold P50,000 of goods and accepted the customer's P50,000 10% 1-year note payable 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. b. c. d.

0 5,000 2,500 1,250

SOLUTION: P50,000 × .10 × 6/12 = P2,500.

5. Garry Co has an 8% note receivable dated June 30, 2010, in the original amount of P150,000. Payments of P50,000 in principal plus accrued interest are due annually on July 1, 2011,2012,2013. In its June 30, 2012 balance sheet, what amount should Garry report as a current asset for interest on the note receivable? a. b. c. d.

8,000 12,000 4,000 0

SOLUTION: (100,000 x 8%) = 8,000 6. Vince Corporation accepted a customer's P50,000 zero-interest-bearing sixmonth note payable in a sales transaction. The product sold normally sells for P46,000. 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. b. c. d.

0 2,000 4,000 5,000

SOLUTION: P50,000 - P46,000 = P4,000 7. Which of the following notes receivable shall be reported at face value? a. Long-term interest bearing notes receivable with stated rate that approximate effective rate. b. Long term interest bearing notes receivable with stated rate lower than effective rate c. Long term non-interest bearing notes receivable d. Long term interest bearing notes receivable with stated rate higher than effective rate 8. A 90-day, 15% interest bearing note was discounted to a bank at 18% after the note was held for 40 days. The proceeds received from the bank upon discounting would be the maturity value less the discount at a. b. c. d.

18% 18% 15% 15%

for for for for

40 50 50 40

days days days days

9. On July 1, 2013, Magno Company sold goods in exchange for P2,000,000, 8month, noninterest bearing note receivable. The note's market rate of interest

was 12%. What amount was received when the note was discounted at 10% on September 1, 2013? a. b. c. d.

1,880,000 1,940,000 1,900,000 1,938,000

10.Assuming the market interest rate is 10% per annum, how much would Victor Co. record as a note payable if the terms of the loan with a bank are that it would have to make one P60,000 payment in two years? a. b. c. d.

49,587 54,422 54,545 60,000

SOLUTION: P60,000 × .82645 = P49,587 11.Honda Company purchased a P20,000, 8%, five-year note that required five equal annual year-end payments of P5009. The note was discounted to yield at 9%. At the date of purchase, the entity recorded the note at its present value of P19,485. The entity does not elect the fair value option. What is the total interest revenue earned over the life of this note? a. b. c. d.

8,000 5,560 9,000 5,045

12.Accounting for the interest in a noninterest bearing note receivable is an example of what aspect of accounting theory? a. b. c. d.

Verifiability Substance over form Accounting entity Matching

13.If the adjusting entry to accrue interest on a note receivable is omitted a. Assets are overstated, net income is understated, and shareholders' equity is understated b. Assets, net income, and shareholders' equity are overstated c. Liabilities are understated, net income is overstated, and shareholders' equity is overstated d. Assets, net income, and shareholders' equity are understated.

14.After being held for 30 days, a 90-day 10% interest bearing note was discounted at a bank at 12%:Discount will be based on a. b. c. d.

30 60 60 30

days days days days

12% at 10% at 12% at 10%

15.Short-term non-interest bearing notes receivable are usually recorded at their a. b. c. d.

Net realizable value Present value Discounted value Maturity value

16.Long-term notes receivable which nominally bear no interest or an interest which is unreasonably low should be recognized initially at a. b. c. d.

Present value Face value Maturity value Net realizable value

17.On December 31, 2013, Glen Corporation sold for P75,000 an old machine having an original cost of P135,000 and a book value of P60,000. The terms of the sale were as follows:  

P15,000 down payment P30,000 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, 2013 rounded to the nearest peso? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) a. b. c. d.

67,773 105,546 52,773 60,000

SOLUTION: P30,000 × 1.75911 = P52,773 Average: 18.If a note receivable is discounted without recourse

a. Liability for note receivable discounted shall be credited b. Note receivable shall be credited c. The contingent liability may be disclosed in either a contra account to note receivable or in a note to the financial statement d. The transaction shall be accounted for as a borrowing as opposed to a sale 19.An entity uses the installment sales method to recognize revenue. Customers pay installment notes in 24 equal monthly amounts, which include 12% interest. What is the installment notes receivable balance six months after the sale? a. Less than 75% of the original sales price b. 75% of the original sales price c. Less than the present value of the remaining monthly payments discounted at 12% d. The present value of the remaining monthly payments discounted at 12% 20.A 90-day 15% interest-bearing note receivable is sold to a bank without recourse after being held for 60 days. The proceeds are calculated using a 12% interest rate. The amount credited to note receivable at the date of the discounting transaction should be a. b. c. d.

The face value of the note Less than the face value of the note The same as the cash proceeds The maturity value of the note

21.After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal a. b. c. d.

Maturity value less the discount at 12% Face value less the discount at 15% Face value less the discount at 12% Maturity value less the discount at 15%

22.If a note receivable is discounted with recourse a. b. c. d.

Note receivable discounted is credited Liability for note receivable discounted is credited A contingent liability does not exist Note receivable must be credited

23.An entity sold goods for which it received a four-month interest bearing note. Note principal, together with all interest is due at maturity. If the note was received and recorded one month after its date, which of the following accounts increased? a. b. c. d.

Unearned discount Interest revenue Prepaid interest Interest receivable

24.On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due in one year. The interest receivable account would show a balance on a. b. c. d.

December 31 but not July 1 Neither July 1 nor December 31 July 1 and December 31 July 1 but not December 31

25.The interest on a noninterest bearing note is equal to a. b. c. d.

Zero The excess of the face value over the present value The excess of the market value over the present value of the note The excess of the present value over the face value

26.When a note receivable is dishonored, it is debited to a. b. c. d.

Accounts receivable at face value Dishonored note receivable at face value Accounts receivable at face value plus interest and other charges Dishonored note receivable at face value plus interest and other charges

27.After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. What is the formula for the proceeds received from the bank? a. b. c. d.

Face value less the discount at 12% Maturity value less the discount at 12% Face value less the discount at 15% Maturity value less the discount at 15%

28.On the basis of substance over form, the interest on a non-interest bearing note is equal to a. b. c. d.

The excess of the present value over the face value Zero The excess of the market value over the present value The excess of the face value over the present value

29.After being held for 30 days, a 90-day, 15 percent interest-bearing note receivable was discounted at a bank at 18 percent. The proceeds received form the bank upon discounting would be the: a. b. c. d.

Maturity value less the discount at 18% Face value less the discount at 15% Face value less the discount at 18% Maturity value less the discount at 15%

30.On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due in one year. The interest receivable account at December 31 of the current year would consist of an amount representing a. Twelve months of accrued interest income b. The excess at October 1 of the present value of the note receivable over its face value c. Nine months of accrued interest income d. Three months of accrued interest income 31.Lester Company received a seven-year zero-interest-bearing note on February 22, 2013, 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, 2013, 7.5% on December 31, 2013, 7.7% on February 22, 2014, and 8% on December 31, 2014. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2013 and 2014, respectively? a. b. c. d.

7% and 7% 7% and 7.7% 7.5% and 8% 0% and 0%

32.Statement 1: Short term notes, interest bearing or non-interest bearing, are stated at face value Statement 2: Interest bearing long term notes shall be stated at face value Statement 3: Non-interest bearing long-term notes shall be stated at discounted value a. b. c. d.

Only statement I is true Only statement II is true Only statement I is false All statements are true

33.A 90-day 15% interest-bearing note receivable is sold to a bank without recourse after being held for 60 days. The proceeds are calculated using a 12% interest rate. The amount credited to note receivable at the date of the discounting transaction would be a. b. c. d.

The maturity value of the note The face value of the note The same as the cash proceeds Less than the face value of the note

34.Assuming that the ideal measure of short-term receivable in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because a. b. c. d.

Most short-term receivables are not interest-bearing The allowance for uncollectible accounts includes a discount element Most receivables can be sold to a bank or factor The amount of discount is not material

35.A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the note receivable discounted account should be a. b. c. d.

Decreased by the face amount of the note Increased by the face amount of the note Decreased by the proceeds from the discounting transaction Increased by the proceeds from the discounting transaction

36.On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due on June 30 of the next year. At December 31 of the current year, the entity should report in its statement of financial position a. Interest receivable for the entire amount of the interest due on June 30 of the next year b. No interest receivable c. A deferred credit for interest applicable to next year d. Interest receivable for the interest accruing in the current year 37.On January 1, 2013, Paul Company sold goods to John Company in which John issued a noninterest bearing note requiring annual payment of P400,000 for 5 years. The first payment was made on January 1, 2013. The prevailing interest rate for this similar note is 12%. The present value of an ordinary annuity of 1 for 5 periods at 12% is 3.60 while the present value for an annuity due of 1 for 5 periods at 12% is 4.04. What total amount of sales revenue should be recognized for 2013 in relation to the sale transaction? a. b. c. d.

1,616,000 1,584,000 1,761,920 2,000,000

SOLUTION: Sales revenue (400,000 x 4.04) Interest income for 2012 (1,616,000 - 400,000 = 1,216,000 x 12% Total amount for sales and interest income

1,616,000 145,920 1,761,920

38.The interest on a noninterest bearing note receivable is equal to a. b. c. d.

The excess of present value over face amount The excess of face amount over present value The excess of fair value over present value Zero

39.At the middle of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due in one year. When the note receivable was initially recorded, which of the following was debited? I. Interest receivable II. Unearned discount on note receivable a. b. c. d.

II only Neither I nor II Both I and II I only

40.On December 31, 2013, Paul Company sold a machine to Roan Company in exPaule for a noninterest bearing note requiring ten annual payments of P100,000. Roan made the first payment on December 31, 2013. The market interest rate for similar notes at date of issuance was 8%. The present value of 1 at 8% is .50 for 9 periods and .46 for 10 periods. The present value of an ordinary annuity of 1 at 8% is 6.25 for 9 periods and 6.71 for 10 periods. What is the carrying amount of the note receivable on December 31, 2013? a. b. c. d.

671,000 625,000 460,000 450,000

41.All of the following are characteristics of loans and receivables, except a. They are unquoted b. The holder can recover substantially all of its investment unless there has been a credit deterioration c. They have fixed or determinable payments d. The holder has a demonstrated positive intention and ability to hold them to maturity 42.On December 31, 2011 balance sheet, a note receivable was reported as a noncurrent asset and its accrued interest for eight months was reported as a current asset. Which of the following terms would best describe the note receivable? a. Both principal and interests are, due December 31, 2013 b. Principal is due April 30, 2013 and interests are due December 31, 2012 and December 31, 2013

c. Principal is due April 30, 2013 and interests are due April 30, 2012 and April 30, 2013. d. Both principal and interests are payable April 30, 2012 43.Paquito Company received from a customer a one-year, P1,000,000 note bearing annual interest of 8%. After holding the note for 4 months, Paquito discounted the note with recourse at a bank at an effective interest rate of 10%. The discounting was treated as conditional sale with a contingent liability. What amount should be reported as net proceeds from discounting? a. b. c. d.

1,000,000 900,000 1,008,000 1,080,000

44.A note receivable bearing a reasonable interest rate is sold to a bank with recourse. The note receivable discounted account was appropriately credited. The note receivable discounted account should be reported as a. b. c. d.

Liability account for the face of the note Contra asset account for the proceeds from the discounting transaction Contra asset account for the face amount of the note Liability account for the proceeds from the discounting transaction

45.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. b. c. d.

Interest revenue Prepaid interest Unearned discount Interest receivable

46.Notes receivable discounted with recourse should be a. b. c. d.

Included in total receivables with disclosure of contingent liability Excluded from total receivables without disclosure of contingent liability Excluded from total receivables with disclosure of contingent liability Included in total receivables without disclosure of contingent liability

Difficult: 47.The Notes receivable account of Maria Co. has a debit balance of P239,200 on December 31, 2012. There was no balance at the beginning of the year. Your analysis of the account reveals the following: 1 Notes amounting to P845,000 were received from customers during the year.

2 Notes of P416,000 were collected on due dates and notes amounting to P221,000 were discounted at the Metro Bank. The Notes receivable account was credited for the notes discounted. 3 Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for P31,200 was dishonored and was charged back to Notes Receivable account. 4 Cash of P33,000 was received as partial payment on notes not yet due. The amount received was credited to Liability on Partial Payments account. 5 A note for P50,000 was pledged as collateral for a bank loan. 6 Included in the company’s cash account balance is a 3 month note from an officer amounting to P8,000which is over a month past due. Assuming that Maria Co. will use a Notes receivable discounted account, the adjusted balance of the Notes Receivable account on December 31, 2012, is a. b. c. d.

323,200 175,000 260,800 364,800

SOLUTION: Unadjusted balance (845,000 - 416,000 - 221,000 + 31,200) Partial collection recorded as a liability Notes receivable discounted still outstanding (221,000 104,000 - 31,200) Dishonored note Adjusted balance

239,200 (33,000) 85,800 (31,200) 260,800

48.The following long-term receivables were reported in the December 31, 2011, statement of financial position of Anna Corporation: Note receivable from sale of plant Note receivable from officer

3,000,000 800,000

The following transactions during 2012 and other information relate to the Company’s long-term receivables: 1 The note receivable from sale of plant bears interest at 12% per annum. The note is payable...