Problem 6-1:

2019
Jan 1 Cash 1,000,000
Notes Receivable 6,000,000
Land 5,000,000
Gain on Sale of Land 2,000,000

Dec 31 Interest Receivable 720,000

Interest Income 720,000
(6,000,000 x 12%)

2020
Dec 31 Interest Receivable 806,400
Interest Income 806,400
(6,000,000 + 720,000) x 12%

2021
Jan 1 Cash 7,526,400
Notes Receivable 6,000,000
Interest Receivable 1,526,400

Problem 6-2:
2019
Jan 1 Notes Receivable 600,000
Sales (Cash Selling Price) 540,000
Unearned Interest Income 60,000

Dec 31 Cash 200,000

Notes Receivable 200,000

Unearned Interest Income 30,000

Interest Income 30,000

Amortization using Outstanding Balance Method: NOT IN ACCORDANCE WITH PFRS WHICH REQ
Fraction Interest Amortization
2019 600,000 6/12 60,000 30,000
2020 400,000 4/12 60,000 20,000
2021 200,000 2/12 60,000 10,000
1,200,000 60,000

USING EFFECTIVE INTEREST METHOD:

PV = PERIODIC CASH PAYMENT X PVF OF ANNUITY OF 1 AT _____% for 3 periods

PV = Cash Selling Price
540,000 = 200,000 x PVF of annuity of 1 at _____% for 3 periods
 PVF = 540,000 / 200,000
PVF = 2.70000
EIR = 5.46%

Date Collection Interest Principal PV

Jan 1, 2019 540,000
Dec 31, 2019 200,000 29,484 170,516 369,484
Dec 31, 2020 200,000 20,174 179,826 189,658
Dec 31, 2021 200,000 10,342 189,658 -

JE to record amortization: 'Dec 31, 2019

UII 29,484
II 29,484

Note: UII Amortization on December 31, 2019

Using Outstanding Balance Method 30,000
Using Effective Interest Method 29,484
Difference 516 If immaterial, then the company can use Out

Problem 6-3:
Periodic payment 300,000 = Face Value of Note
x PVF of annuity of 1 2.4018 # of payments
PV of Notes 720,540 Periodic Payment

Face Value of Note 900,000

Present Value 720,540
Discount on NR/Unearned Interest Income 179,460

Present Value 720,540

Cash Received 100,000
Sales Price 820,540
Cost Generator 700,000
Gross Income 120,540

Jan 1 Cash 100,000

Notes Receivable 900,000
Sales 820,540
Unearned Interest Income 179,460
If the company is using perpetual inventory system, additional journal entry:
Cost of Goods Sold 700,000
Finished Goods Inventory 700,000
Dec 31 Cash 300,000
Notes Receivable 300,000

Amortization Table
Date Collection Interest Principal PV
Jan 1 2019 720,540
Dec 31 2019 300,000 86,465 213,535 507,005
Dec 31 2020 300,000 60,841 239,159 267,845
Dec 31 2021 300,000 32,141 267,859 (13)

Dec 31 Unearned Interest Income 86,465

Interest Income 86,465

Problem 6-4
Periodic payment 500,000
# of payments 5
interest rate 8%

Periodic Payment 500,000

x PVF of annuity of 1 at 8% for 5 periods 3.99
Present Value of Notes 1,995,000

Amortization Table
Date Collection Interest Principal PV
Dec 31, 2019 1,995,000
Dec 31, 2020 500,000 159,600 340,400 1,654,600 Requirement 2: Carrying amount of NR on 12
Dec 31, 2021 500,000 132,368 367,632 1,286,968 Assuming, you are preparing the SFP as of De
Dec 31, 2022 500,000 102,957 397,043 889,925 PV of NR on December 31, 2020
Dec 31, 2023 500,000 71,194 428,806 461,119 Current Portion
Dec 31, 2024 500,000 38,881 461,119 - Non-Current Portion

Requirement 3: Interest Income for 2021

Journal Entries:
Dec 31 2019
Notes Receivable 2,500,000
Sales 1,995,000
Unearned Interest Income 505,000

Dec 31 2020 Cash 500,000

Notes Receivable 500,000

Unearned Interest Income 159,600

Interest Income 159,600
Problem 6-5:
Cost 500,000
Carrying Amount 350,000
Accumulated Depreciation 150,000

Consideration:
Down Payment 125,000
Non-interest bearning Note (3 years) 400,000

EIR 12%
PVF 0.7118

PV of Note:
Face Value 400,000
PVF 0.7118
PV 284,720

Face Value 400,000

PV 284,720
Unearned Interest Income 115,280

PV 284,720
Cash received 125,000
Selling Price 409,720
Carrying Amount 350,000
Gain on Sale 59,720

Journal Entries:
2019
Jan 1 Cash 125,000
Notes Receivable 400,000
Accumulated Depreciation 150,000
Equipment 500,000
Gain on Sale of Equipment 59,720
Unearned Interest Income 115,280
Amortization Table
Interest Unearned
Date Income Interest PV
Jan 1 2019 115,280 284,720
Dec 31 2019 34,166 81,114 318,886 or FV - UII 318,886.40
Dec 31 2020 38,266 42,847 357,153
Dec 31 2021 42,847 - 400,000

Dec 31 Unearned Interest Income 34,166

 Interest Income 34,166

2020
Dec 31 Unearned Interest Income 38,266
Interest Income 38,266

2021
Dec 31 Unearned Interest Income 42,847
Interest Income 42,847

2022
Jan 1 Cash 400,000
Notes Receivable 400,000

Problem 6-6

Date of Note Interest Rate

Jan 1 2019 N/R from sale of an idle building 7,500,000 May 1 2018 9%

Jan 1 2019 N/R from an officer 2,000,000 Dec 31 2016 8%

New Issuance
N/R from Boom Company 2,800,000 Jul 1 2019 10%

Requirement 1:
Notes Receivable from sale of building, due May 1, 2020 2,500,000
Accrued interest on NR from sale of building from May 1 to Dec 31 2019
(5,000,000 x 9% x 8/12) 300,000
Principal payment of NR from sale of land due July 1, 2020
Annual installment 880,000
Interest from 7/1/2019 to 7/1/2020
(2,800,000 x 10%) 280,000 600,000
Accured interest on NR from sale of land from July1 to Dec 31 2019
(280,000 x 6/12) 140,000
Total Current Receivables - December 31, 2019 3,540,000

Requirement 2:
Notes Receivable from Sale of Building due May 1, 2021 2,500,000
NR from Officer 2,000,000
NR from sale of land - non-current portion
Principal 2,800,000
Due July 1, 2020 (600,000) 2,200,000
Total Non-current Notes Receivable - December 31, 2019 6,700,000
NCE WITH PFRS WHICH REQUIRES THE USE OF EFFECTIVE INTEREST METHOD (EIM); MAY BE USED IF DIFFERENCE WITH EIM IS IMMATERIA

use interpolation
periodic
PVF of annuity of 1 for 3 periods payment PV
at 5% 2.7232 The effective interest rate is between 5% 200,000 544,640
at 6% 2.6730 and 6% 200,000 534,600
 interpolation: PV of unknown rate - pv at lower rate
pv at higher rate - pv at lower rate

540,000 - 544,640
534,600 - 544,660

(4,640)
(10,040)

0.46 differential

EIR = lower rate + differential

5% + .46%
5.46%

the company can use Outstanding Balance Method

e Value of Note 900,000

f payments 3
iodic Payment 300,000

If the company is using perpetual inventory system:

Additional Journal Entry:
Cost of Goods Sold 700,000
Merchandise Inventory 700,000
arrying amount of NR on 12/31/2020
preparing the SFP as of December 31, 2020, how will you present the NR? Current, Noncurrent
mber 31, 2020 1,654,600
367,632
1,286,968
1,654,600
 Principal
and
Interest
Principal Payments
Source Payment Due Due Date

Annually
Sale of Idle Beg May 1
Building 2,500,000 2019 May 1 2021

Interest is
From payable Dec 31
President - annually 2021

Sale of Land 880,000 Jul 1 2023 3,520,000

2.5 points Balance principal 2,800,000

1 point interest at 10% Interest Principal Total
2,800,000 year 1 280,000 700,000 980,000
2,100,000 year 2 210,000 700,000 910,000
1,400,000 year 3 140,000 700,000 840,000
 700,000 year 4 70,000 700,000 770,000
3,500,000
Divide by 4 years
2.5 points 875,000
1 point
CE WITH EIM IS IMMATERIAL

The PV of 540,000 is between

544,640 and 534,600
880,000