Notes and Loans Receivable PDF

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QUIZ No. 1 : NOTES AND LOANS RECEIVABLE 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 acco...

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QUIZ No. 1 : NOTES AND LOANS RECEIVABLE

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 account 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 at October 1 of the present value of the note receivable over its face value Answer : A 2. Accounting for the interest in a noninterest bearing note receivable is an example of what aspect of accounting theory? a. Matching b. Verifiability c. Substance over form d. Form over substance Answer : C 3. 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 next year. The interest receivable account would show a balance on a. July 1 but not December 31 of the current year b. December 31 but not July 1 of current year c. July 1 and December 31 of the current year d. Neither July 1 nor December 31 of the current year Answer : B 4. 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 interest are due in one year. When note receivable was recorded on July 1, which of the following was debited? a. Interest receivable b. Unearned discount on note receivable c. Both interest receivable and unearned discount on note receivable d. Neither interest receivable nor unearned discount on note receivable Answer : D 5. A loan receivable is initially measured at a. Fair value b. Fair value plus transaction cost

c. Fair value minus transaction cost d. Present value Answer : B 6. In calculating the carrying amount of loan receivable, the lender adds to the principal a. Direct loan origination cost incurred by the lender b. Indirect loan origination cost incurred by the lender c. Loan origination fee charged to the borrower d. Interest incurred by the borrower Answer : A 7. A loan receivable shall be measured subsequently at a. Cost b. Amortized cost using the straight line method c. Amortized cost using the effective interest method d. Fair value Answer : C 8. Depending on certain criteria, a note receivable discounted with recourse is recognized as a. Conditional sale b. Secured borrowing c. Either as conditional sale or secured borrowing d. Neither conditional sale nor secured borrowing Answer : C 9. IF a note receivable is discounted without recourse a. The contingent liability may be disclosed. b. Liability for note receivable discounted should be credited. c. Note receivable should be credited. d. The transaction should be accounted for as a borrowing. Answer : C 10.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. The same as the cash proceeds b. Less than the face value of the note c. The face value of the note d. The maturity value of the note Answer : C 11.A note receivable bearing a reasonable interest rate is sold to a bank wit recourse. At the date of the discounting, the note receivable discounted account should be

a. Decreased by the net proceeds from discounting b. Increased by the net proceeds from discounting c. Increased by the face amount of the note d. Decreased by the face amount of the note Answer : C 12.After being held for 30 days a 120-day 12% interest bearing note receivable was discounted at a bank at 15%. The amount received from the bank is equal to a. Maturity value less discount at 12% b. Maturity value less discount at 15% c. Face value less discount at 12% d. Face value less discount at 15% Answer : B 13.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 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 this year Answer : D 14.Charity Company has an 8% note receivable dated June 30, 2020, in the original amount of P1,500,000. Payments of P500,000 in principal plus accrued interest are due annually on July 1, 2021, 2022 and 2023. In the June 30, 2022 statement of financial position, what amount should be reported as a current asset for interest on the note receivable? Answer : 80,000 (1,500,000 – 500,000 = 1,000,000 x 8% = 80,000) Charity Company has an 8% note receivable dated June 30, 2020, in the 15. original amount of P1,500,000. Payments of P500,000 in principal plus accrued interest are due annually on July 1, 2021, 2022 and 2023. In the June 30, 2022 statement of financial position, what amount should be reported as a current asset for interest on the note receivable? Answer : 80000 (1,500,000 – 500,000 = 1,000,000 x 8% = 80,000 x 6/12 = 40,000)

16.On June 1, 2020, Charity Company loaned P500,000 on a 12% note, payable in five equal annual installments of P100,000 beginning January 1, 2021. Interest on the note is payable on the first day of each month beginning July 1, 2020. The borrower made timely payments through November 1, 2020. On January 1, 2021, the entity received payment of the first principal installment plus all interest due. On December 31, 2020, what amount should be reported as accrued interest receivable? Answer : 10,000 (500,000 x 12% x 2/12 = 10,000) 17.On June 1, 2020, Charity Company loaned P500,000 on a 12% note, payable in five equal annual installments of P100,000 beginning January 1, 2021. Interest on the note is payable on the first day of each month beginning July 1, 2020. The borrower made timely payments through November 1, 2020. On January 1, 2021, the entity received payment of the first principal installment plus all interest due. For the year end December 31, 2020, what amount should be reported as interest income for this note? Answer : 35,000 (500,000 x 12% x 7/12 = 35,000) 18.Charity Company sold an equipment with a carrying amount of P800,000, receiving a noninterest-bearing note due in three years with a face amount of P1,000,000. There is no established market value for the equipment. The interest rate on similar obligations is estimated at 12%. The present value of 1 at 12% for three periods is .712. What amount of interest income should be reported for the first year? Answer : 85,440 (1,000,000 x .712 = 712,000 x 12%) 19.Charitable Bank granted a 10-year loan to Chaste Company in the amount of P1,500,000 with a stated interest rate of 6%. Payments are due monthly and are computed to be P16,650. Charitable Bank incurred P40,000 of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, the bank charged Chaste Company a 4% nonrefundable loan origination fee. What is the initial carrying amount of the loan receivable to reported by Charitable Bank? Answer : 1,480,000 (1,500,000 + 40,000 – (1,500,000 x 4%) = 1,480,000

20.On January 1, 2020, Charitable Bank made a P1,000,000, 8% loan. The P80,000 interest is receivable at the end of each year, with the principal amount to be received at the end of five years. On December 31, 2020, the first year’s interest of P80,000 has not yet been received because the borrower is experiencing financial difficulties. The borrower negotiated a restructuring of the loan. The payment of all of the interest for 5 years will be delayed until the end of the 5-year loan term. In addition, the amount of principal repayment will be dropped from P1,000,000 to P500,000. The PV of 1 at 8% for 4 periods is .735, and the PV of 1 at 8% for 5 periods is .68. No interest revenue has been recognized in 2020 in connection with the loan. What is the loan impairment loss for 2020? Answer : 338,500 21.On January 1, 2020, Charitable Bank made a P1,000,000, 8% loan. The P80,000 interest is receivable at the end of each year, with the principal amount to be received at the end of five years. On December 31, 2020, the first year’s interest of P80,000 has not yet been received because the borrower is experiencing financial difficulties. The borrower negotiated a restructuring of the loan. The payment of all of the interest for 5 years will be delayed until the end of the 5-year loan term. In addition, the amount of principal repayment will be dropped from P1,000,000 to P500,000. The PV of 1 at 8% for 4 periods is .735, and the PV of 1 at 8% for 5 periods is .68. No interest revenue has been recognized in 2020 in connection with the loan. What is interest income for 2021? Answer : 52,920 22.On January 1, 2020, Charity Company sold equipment to a customer for P1,000,000. The entity accepted a 10% note receivable for the entire sale price. This note is payable in two equal installments of P500,000 plus accrued interest on December 31, 2020 and December 31, 2021. The first installment collection was made on December 31, 2020. On July 1, 2021, the entity discounted the note at a bank at an interest rate of 12%. What is the amount received from the discounting of note receivable? Answer : 517,000 MV = (1,000,000 – 500,000 x 10% x 12/12 ) + 500,000 = 550,000 Discount = 550,000 x 12% x 6/12 = 33,000 Net Proceeds = 517,000 23.Pink Company has an 8% note receivable dated June 30, 2019, in the original amount of P600,000. Payments of P200,000 in principal plus accrued interest are due annually on July 1, 2020, 2021, and 2022. In its June 30, 2020 statement of financial position, what amount should Pink Company report as a current asset for interest on the note receivable?

Answer : 32,000 (600,000 – 200,000) x 8% = 32,000 24.Pink Company accepted a P200,000, 90-day, 12% interest bearing note dated November 15, 2019 from a customer. On December 15, 2019, Pink discounted the note with recourse at a Bank Company at 15% discount rate. On maturity date, the maker of the note did not pay the note and as a result, Bank Company charged Pink Company for the total amount due plus P2,000 protest fee. How much should Pink Company pay to Bank Company when the maker fails to pay the note upon its maturity? Answer : 208,000 MV = 206,000 (Int = 200,000 x 12% x 90/360) + Protest Fee of 2,000 25.Pink Company accepted a P200,000, 90-day, 12% interest bearing note dated November 15, 2019 from a customer. On December 15, 2019, Pink discounted the note without recourse at a Bank Company at 15% discount rate. What amount of interest income should Pink Company recognize related to the notes receivable in its December 31, 2019 statement of financial position? Answer : 3,000

2,000 x 12% x 45/360

26.On January 2, 2019. Black Company sold equipment with a carrying amount of P480,000 in exchange for a P600,000 non-interest bearing note due January 2, 2022. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2019 was 10%. The present value of 1 at 10% for three periods is 0.7513. How much should Black Company report as interest income in its 2019 profit or loss? Answer should be rounded off to the nearest peso (no decimal places) Answer : 45,078 600,000 x .7513 = 450,780 x 10% = 45,078 27.On January 2, 2019. Black Company sold equipment with a carrying amount of P480,000 in exchange for a P600,000 non-interest bearing note due January 2, 2022. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2019 was 10%. The present value of 1 at 10% for three periods is 0.7513.

How much should Black Company report as gain or loss on sale of equipment in its 2019 statement of financial performance? Answer should be rounded off to the nearest peso (no decimal places). Place a negative (-) sign if your answer is a loss. Answer : (29,280) Loss 450,780 – CA 480,000 = 29,280 loss 28.True or False : A loan receivable shall be measured subsequently at amortized cost using the straight line method. Answer : False 29.True or False : If a note receivable is discounted without recourse, Note Receivable Discounted account should be credited. Answer : False 30.True or False : In discounting of note receivable, the interest income is credited for the actual interest earned on the date of discounting. Answer : True...