On January 1, 2021, Joy Company sold used equipment and received a non-interest bearing note requiring payment of P2,000,000 principal on December 31, 2022. PDF

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Summary

Requirement:
1. Prepare the necessary journal entry to record the above transactions.
2. How much is the carrying value of the notes receivable on December 31, 2021?
3. Assuming the customer failed to pay the notes on December 31, 2022, prepare the journal entry to record the di...

Description

PROBLEM 1 On January 1, 2021, Joy Company sold used equipment and received a non-interest bearing note requiring payment of P2,000,000 principal on December 31, 2022. The prevailing rate of interest for this type of note at the date of issuance is 10%. On January 1, 2022, to augment the company's cash requirement, Joy Company discounted the note to a financial institution at 14%. On December 31, 2022, the factor collected in full the notes receivable. The discounting is accounted for as a secured borrowing. Requirement: 1. Prepare the necessary journal entry to record the above transactions. 2. How much is the carrying value of the notes receivable on December 31, 2021? 3. Assuming the customer failed to pay the notes on December 31, 2022, prepare the journal entry to record the dishonored note. Answer:

1. Journal entries 2021 Jan 1 Notes receivable Equipment 2022 Jan 1 Cash Interest expense Liability on note receivable discounted Dec 31

Liability on note receivable discounted Notes receivable Maturity Value Discount (2,000,000 x 14% x 1yr) Net Proceeds

2,000,000 280,000 1,720,000

Net Proceeds Carrying value of notes receivable Interest expense

1,720,000 2,000,000 ( 280,000)

2,000,000 2,000,000 1,720,000 280,000 2,000,000 2,000,000 2,000,000

2. Carrying value of the notes receivable on December 31, 2021 is P2,000,000.

3. Journal entry for dishonored note Accounts receivable Cash

2,000,000

Liability on note receivable discounted

2,000,000

2,000,000

Notes receivable 2,000,000 ------------------------------------------------------------------------------------------------------------------------------PROBLEM 2 On January 1, Gabriel Company sold land with a carrying value of P1,000,000 in exchange for a 1-year, 8% note with a face value of P1,500,000. The 8% rate properly reflects the time value of money for this type of note. On March 1, Gabriel Company discounted the note with recourse and accounted as a conditional sale. The bank discount rate is 10%. On September 1, the maker dishonored the notes receivable. In return, Gabriel Company pays the factor the maturity value of the note plus a protest fee of P5,000. At the end of the year, Gabriel Company collected the dishonored note in full plus a 10% interest on the total amount due. Requirements: 1. Prepare the necessary journal entry to record the above transactions. 2. Assuming that the March 1 transaction did not happen, prepare the necessary journal entry to record the above transactions Answer:

1. Journal entries Jan 1 Notes receivable Land Gain on sale of land Mar 1

Sept 1

Dec 31

1,500,000 1,000,000 500,000

Cash Loss on note discounting Notes receivable discounted Interest income Accounts receivable Cash

1,485,000 35,000 1,500,000 20,000 1,625,000 1,625,000

Notes receivable discounted Notes receivable

1,500,000

Cash

1,679,167

1,500,000

Accounts receivable Interest income (1,625,000 x 10% x 4/12) Principal Interest (1,500,000 x 8% x 1) Maturity Value Discount (1,620,000 x 10% x 10/12) Net Proceeds

1,500,000 120,000 1,620,000 135,000 1,485,000

Principal

1,500,000

1,625,000 54,167

Accrued Interest (1,500,000 x 8% x 2/12) Carrying value of notes receivable

20,000 1,520,000

Net Proceeds Carrying value of notes receivable Loss on discounting

1,485,000 1,520,000 ( 35,000)

2. Journal entry w/o March 1 Jan 1

Sept 1

Dec 31

Notes receivable Land Gain on sale of land

1,500,000

Accounts receivable Notes receivable Interest income

1,620,000

Cash

1,000,000 500,000

1,674,000 Accounts receivable Interest income (1,620,000 x 10% x 4/12)

1,500,000 20,000

1,620,000 54,000...