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Problem 6-7 (IAA)Nova Company reported the following receivables on December 31, 2020:Accounts receivable, net of P500,000 allowance for doubful accounts 4,600, Interest receivable 190, Notes receivable 4,000, The notes receivable comprised:P1,000,000 note dated October 31, 2020, with principal and...

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Problem 6-7 (IAA)

Nova Company reported the following receivables on December 31, 2020:

Accounts receivable, net of P500,000 allowance for doubtful accounts Interest receivable Notes receivable



4,600,000 190,000 4,000,000

The notes receivable comprised: P1,000,000 note dated October 31, 2020, with principal and interest payable on October 31, 2021. P3,000,000 note dated March 31, 2020, with principal and 8% interest payable on March 31, 2021



During 2021, sales revenue totaled P21,000,000, P18,000,000 cash was collected from customers, and accounts receivable of P600,000 were written off. All sales were made on a credit basis.



Doubtful accounts expense was recorded at year-end by adjusting the allowance account to an amount equal to 10% of year-end accounts receivable.

1. What amount should be reported as interest income for 2021? a. 110,000 b. 240,000 c. 60,000 d. 80,000

2. What amount should be reported as doubtful accounts expense for 2021? a. 750,000 b. 850,000 c. 600,000 d. 100,000

Solution 6-7 Question 1 Answer a P3,000,000 x 8% x 3/12 P1,000,000 x 6% x 10/12 Total interest revenue

60,000 50,000 110,000

Interest rate on the P1,000,000 note Accrued interest receivable Accrued interest on P3,000,000 Accrued interest on P1,000,000

190,000 (180,000) 10,000

10,000/2 = 5,000/month P5,000 x 12 = P60,000/ P1,000,000 = 6%

Question 2 Answer b Accounts receivable Credit sales Cash collection Writeoff Accounts receivable

5,100,000 21,000,000 (18,000,000) ( 600,000) 7,500,000

P7,500,000 x 10% = P750,000 (required allowance for doubtful account)

Writeoff

600,000

Allowance for Doubtful Account 500,000 850,000 750,000

Beginning balance Doubtful account

Problem 6-12 (AICPA Adapted)

On December 31, 2020, Precious Company sold an equipment with carrying amount of 2,000,000 and received a noninterest-bearing note requiring payment of 500,000 annually for ten years. The first payment is due December 31, 2021 The prevailing rate of interest for this type of note at date of issuance is 12%. Present value of 1 at 12% for 10 periods = 0.322 Present value of ordinary annuity of 1 at 12% for 10 periods = 5.650 1. On December 31, 2020, what is the carrying amount of the note receivable? a. 5,000,000 b. 2,175,000 c. 1,610,000 d. 2,825,000 2. What is the gain on sale of equipment to be recognized in 2020? a. 3,000,000 b. 2,175,000 c. 825,000 d. 0 3. What Amount of interest income should be recognized for 2021? a. 600,000 b. 339,000 c. 319,800 d. 300,000 4. What is the carrying amount of the note receivable on December 31, 2021? a. 2,325,000 b. 4,500,000 c. 2,825,000 d. 2,664,000

Solution 6-12 Question 1 Answer d Present value of note (500,000 x 5.65)

2,825,000

Question 2 Answer c Present value Carrying amount Gain on sale

2,825,000 2,000,000 825,000

Question 3 Answer b Interest income for 2021 (2,825,000 x 12%)

339,000

Question 4 Answer d Present value Unearned interest income Carrying amount

2,825,000 ( 161,000) 2,664,000

Problem 6-17 (AICPA Adapted)

1. 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 on September 30 of next year. The interest receivable on December 31 of the current year would consist of an amount representing a. Three months of accrued interest income b. Nine months of accrued interest income c. Twelve months of accrued interest income d. The excess on October 1 of the present value of the note receivable over the face amount

2. On July 1 of the current year, an entity obtained a two- year 8% note receivable for services rendered. At that time, the market rate of interest was 10%. The face amount of the note and the entire amount of interest are due on the date of maturity. Interest receivable on. December 31 of the current year is a. 5% of the face amount of the note b. 4% of the face amount of the note c. 5% of the present value of the note d. 4% of the present value of the note

3. An entity uses the instalment method to recognize revenue from installment sales. Customers pay the installment notes in 24 equal monthly amounts which include 12% interest. What is the installment notes receivable six months after the sale? a. 75% of the original sales price b. Less than 75% of the original sales price c. The present value of the remaining monthly payments discounted at 12% d. Less than the present value of the remaining monthly payments discounted at 12%

4. What is imputed interest? a. Interest based on the stated interest rate b. Interest based on the implicit interest rate c. Interest based in the average interest rate d. Interest based on the bank prime interest rate

5. Accounting for the interest in a noninterest bearing note receivable is an example of what aspect of accounting theory? a. Matching b. Verifiable c. Substance over form d. Form over substance

6. 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. July 1 but not December 31 b. December 31 but not July 1 c. July 1 and December 31 d. Neither July 1 nor December 31

7. 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 amount of the note receivable and the entire amount of the interest are due in one year. When the note receivable was recorded on July 1, which of the following was debited? a. Interest receivable b. Unearned discount on note receivable c. Interest receivable and unearned discount on note receivable d. Neither interest receivable nor unearned discount on note receivable

8. 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

9. 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 amount of the note receivable and the entire amount of the interest are due on June 30 of next year. On December 31 of the current year, the entity should report in the statement of financial position a. A deferred credit for interest applicable to next year b. No interest receivable c. Interest receivable for the entire amount of the interest due on June 30 of next year d. Interest receivable for the interest accruing in the current year

10. An entity received a seven-year zero interest bearing note on February 1, 2020 in exchange for the property sold. There was no established exchange price for the property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 1, 2020, 6% on December 31, 2020, 8% on February 1, 2021, and 9% on December 31, 2021. What interest rate should be used to calculate the interest revenue from the transaction for the years ended December 31, 2020 and 2021, respectively? a. 0% and 0% b. 7% and 7% c. 7% and 9% d. 6% and 9%

Answer: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A B C B C B D B D B...