Page |1

Chapter 5
Notes Receivable

NAME: Date:
Professor: Section: Score:

QUIZ 1:
1. Present value is
a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.

2. Which of the following factors would show the largest value for an interest rate of 12% for six
periods?
a. Present value of 1
b. Present value of an ordinary annuity of 1
c. Present value of an annuity due of 1
d. Answer cannot be determined

3. What factor should you use if you want to determine the value now of a ₱1,000 payment due in
three years’ time?
a. Future value of 1
b. Present value of 1
c. Present value of an ordinary annuity of 1
d. Present value of an annuity due of 1

4. What factor should you use for a ₱1,000 note receivable that is collectible in five annual
installments of ₱200 starting one year hence?
a. Present value of 1
b. Present value of an ordinary annuity of 1
c. Present value of an annuity due of 1
d. Any of these

5. What factor should you use for a ₱2,000 note receivable that is collectible in full after five years?
a. Present value of 1
b. Present value of an ordinary annuity of 1
c. Present value of an annuity due of 1
d. Any of these

6. Which of the following results to the smallest value?

a. Present value of an annuity due of 1 @12%, n=5
b. Present value of an ordinary annuity of 1 @12%, n=5
c. Present value of 1 @12%, n=5
d. Present value of 1 @14%, n=5

7. A higher interest rate results to

 Page |2

a. increased amount of present value.

b. decreased amount of present value.
c. same amount of present value.
d. Answer cannot be determined due to insufficient data

8. A shorter period results to

a. increased amount of present value.
b. decreased amount of present value.
c. same amount of present value.
d. shorter accountant.

9. The present value of 1 for a period of zero equals

a. 1.
b. 0.
c. Error!
d. Answer depends on the interest rate

10. Multiplying a lump sum future amount by a Present Value of 1 factor results to
a. Future amount.
b. Future value of 1.
c. Present value.
d. Present value of 1.

“Be kind and compassionate to one another, forgiving each other, just as in Christ
God forgave you.” (Ephesians 4:32)

- END -

NAME: Date:
Professor: Section: Score:

QUIZ 2:
 Page |3

1. An entity sells goods either on cash basis or on 6-month installment basis. On January 1, 20x1,
goods with cash price of ₱50,000 were sold at an installment price of ₱75,000. Which of the
following statements is correct?
a. Net receivable of ₱75,000 is recognized on the date of sale.
b. Net receivable of ₱50,000 is recognized upon full payment of the total price.
c. The ₱20,000 difference between the cash price and installment price is recognized as interest
income on the date of sale.
d. Net receivable of ₱50,000 is recognized on the date of sale.

2. An entity sells goods for ₱150,000 to a customer who was granted a special credit period of 1
year. The entity normally sells the goods for ₱120,000 with a credit period of one month or with
a ₱10,000 discount for outright payment in cash. How much is the initial measurement of the
receivable?
a. 150,000
b. 120,000
c. 130,000
d. 110,000

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. sold a transportation equipment with a historical cost of ₱1,000,000 and
accumulated depreciation of ₱300,000 in exchange for cash of ₱100,000 and a noninterest-bearing
note receivable of ₱800,000 due on January 1, 20x4. The prevailing rate of interest for this type of
note is 12%.

3. How much is the interest income in 20x1?

a. 68,331
b. 76,532
c. 85,714
d. 96,000

4. How much is the carrying amount of the receivable on December 31, 20x2?
a. 800,000
b. 569,424
c. 637,755
d. 714,286

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. sold transportation equipment with a historical cost of ₱20,000,000 and
accumulated depreciation of ₱7,000,000 in exchange for cash of ₱500,000 and a noninterest-bearing
note receivable of ₱8,000,000 due in 4 equal annual installments starting on December 31, 20x1 and
every December 31 thereafter. The prevailing rate of interest for this type of note is 12%.

5. How much is the interest income in 20x1?

a. 728,946
b. 678,334
c. 728,964
d. 704,236
 Page |4

6. How much is the current portion of the receivable on December 31, 20x1?
a. 1,271,036
b. 1,423,560
c. 3,380,102
d. 1,594,388

7. How much is the carrying amount of the receivable on December 31, 20x2?
a. 4,803,663
b. 3,380,102
c. 6,074,699
d. 6,000,000

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. sold transportation equipment with a historical cost of ₱12,000,000 and
accumulated depreciation of ₱7,000,000 in exchange for cash of ₱100,000 and a noninterest-bearing
note receivable of ₱4,000,000 due in 4 equal annual installments starting on January 1, 20x1 and
every January 1 thereafter. The prevailing rate of interest for this type of note is 12%.

8. How much is the interest income in 20x1?

a. 408,230
b. 278,334
c. 328,964
d. 288,220

9. How much is the carrying amount of the receivable on December 31, 20x1?
a. 1,690,510
b. 892,857
c. 2,690,051
d. 1,594,388

10. How much is the carrying amount of the receivable on January 1, 20x3?
a. 892,857
b. 3,380,102
c. 6,074,699
d. 6,000,000

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. sold machinery with historical cost of ₱3,000,000 and accumulated
depreciation of ₱900,000 in exchange for a 3-year, ₱2,100,000 noninterest-bearing note receivable due
in equal semi-annual payments every July 1 and December 31 starting on July 1, 20x1. The
prevailing rate of interest for this type of note is 10%.

11. How much is the interest income in 20x1?

a. 88,825
b. 177,649
c. 128,964
d. 164,591
 Page |5

12. How much is the carrying amount of the receivable on December 31, 20x1?
a. 1,241,083
b. 982,378
c. 1,690,051
d. 1,594,388

13. On January 1, 20x1, ABC Co. sold machinery costing ₱3,000,000 with accumulated depreciation
of ₱1,100,000 in exchange for a 3-year, ₱900,000 noninterest-bearing note receivable due as
follows:
Date Amount of installment
December 31, 20x1 400,000
December 31, 20x2 300,000
December 31, 20x3 200,000
Total 900,000

The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of
the receivable on December 31, 20x1?
a. 467,354
b. 438,016
c. 376,345
d. 428,346

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. sold inventory costing ₱1,800,000 with a list price of ₱2,200,000 and a
cash price of ₱2,000,000 in exchange for a ₱2,400,000 noninterest-bearing note due on December 31,
20x3.

14. How much is the initial measurement of the receivable?

a. 1,800,000
b. 2,200,000
c. 2,000,000
d. 2,400,000

15. How much is the carrying amount of the receivable on December 31, 20x1?
a. 2,125,390
b. 2,135,341
c. 2,098,343
d. 2,000,000

“Not only so, but we also glory in our sufferings, because we know that suffering
produces perseverance;” (Romans 5:3)

-END-
 Page |6

SOLUTIONS TO QUIZ 2:
1. D
2. D
Solution:
Normal selling price with credit period of one month 120,000
Discount for cash on delivery (10,000)
Cash price equivalent of the goods sold 110,000

3. A
Solution:
Initial measurement: 800,000 x PV of 1 @12%, n=3 = 569,424

Subsequent measurement:
Date Interest income Unearned interest Present value
1/1/x1 230,576 569,424
12/31/x1 68,331 162,245 637,755
12/31/x2 76,531 85,714 714,286
12/31/x3 85,714 - 800,000

4. D (See solution above)

5. C
Solution:
Initial measurement: (8M ÷ 4) x PV ordinary annuity of 1 @12%, n=4 = 6,074,699

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
1/1/20x1 6,074,699
12/31/20x1 2,000,000 728,964 1,271,036 4,803,663
12/31/20x2 2,000,000 576,440 1,423,560 3,380,102
12/31/20x3 2,000,000 405,612 1,594,388 1,785,714
12/31/20x4 2,000,000 214,286 1,785,714 0

6. B (See solution above)

7. B (See solutions above)

8. D (See solutions below)

9. C
Solutions:
Initial measurement: (4M ÷ 4) x PV annuity due of 1 @12%, n=4 = 3,401,831

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 3,401,831
Jan. 1, 20x1 1,000,000 - 1,000,000 2,401,831
Jan. 1, 20x2 1,000,000 288,220 711,780 1,690,051
Jan. 1, 20x3 1,000,000 202,806 797,194 892,857
Jan. 1, 20x4 1,000,000 107,143 892,857 0

The carrying amount of the notes receivable as of December 31, 20x1 is determined as follows:
Carrying amount of notes receivable - Jan. 1, 20x2 1,690,051
Add back: Collection on Jan. 1, 20x2 1,000,000
Carrying amount of notes receivable - Dec. 31, 20x1 2,690,051
 Page |7

10. A (See solution above)

11. D
Solution:
Initial measurement: (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6 = 1,776,492

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 1,776,492
July 1, 20x1 350,000 88,825 261,175 1,515,317
Dec. 31, 20x1 350,000 75,766 274,234 1,241,083
July 1, 20x2 350,000 62,054 287,946 953,137
Dec. 31, 20x2 350,000 47,657 302,343 650,794
July 1, 20x3 350,000 32,540 317,460 333,333
Dec. 31, 20x3 350,000 16,667 333,333 0

Interest income in 20x1 = (88,825 + 75,766) = 164,591

12. A (See solution above)

13. B
Solution:
Initial measurement:
PV of P1 @ 10%,
Date Collections Present value
n= 1 to 3
Dec. 31, 20x1 400,000 0.90909 363,636
Dec. 31, 20x2 300,000 0.82645 247,935
Dec. 31, 20x3 200,000 0.75131 150,262
Totals 900,000 761,833

Subsequent measurement:
Date Collections Interest income Amortization Present value
Jan. 1, 20x1 761,833
Dec. 31, 20x1 400,000 76,183 323,817 438,016
Dec. 31, 20x2 300,000 43,802 256,198 181,818
Dec. 31, 20x3 200,000 18,182 181,818 0

14. C – equal to cash price equivalent.

15. A
Solution:
First trial: (at 10%)
Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV of P1 @ 10%, n=3 = 2,000,000
 (2,400,000 x 0.751315) = 1,803,156 is not equal to 2,000,000
We need a substantially higher amount of present value. Therefore, we need to decrease substantially
the interest rate. Let’s try 6%.

Second trial: (at 6%)

Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV factor at 6%, n=3 = 2,000,000
 (2,400,000 x 0.839619) = 2,015,086 is not equal to 2,000,000
We need a slightly lower amount of present value. Therefore, we need to increase slightly the interest
rate. Let’s try 7%.

Third trial: (at 7%)

Future cash flows x PV factor at x% = PV of note
 2,400,000 x PV factor at 7%, n=3 = 2,000,000
 (2,400,000 x 0.816298) = 1,959,115 is not equal to 2,000,000
 Page |8

In here, we need to perform interpolation. Looking at the values derived above, we can reasonably
expect that the effective interest rate is a rate between 6% and 7%.

To perform the interpolation, we will use the following formula:

x% - 6%
7% - 6%

Where: x% again is the effective interest rate.

The formula was derived based on our expectation that the effective interest rate is somewhere between
6% and 7%.Notice that the lower rate appears in both the numerator and denominator of the formula
while x% appears in the numerator.

Let us substitute the amounts of present values computed earlier on the formula.
2,000,000 - 2,015,086 (15,086)
= = 0.2695
1,959,115 - 2,015,086 (55,970)

The amount computed is added to 6% to derive the effective interest rate. The effective interest rate is
6.2695% (6% + .2695%).

If other methods or tools were used, such as a financial calculator or spreadsheet application, the exact
rate is 6.265856927%.

The amortization table using 6.2695% as the effective interest rate is presented below.
Date Interest income Unearned interest Present value
Jan. 1, 20x1 400,000 2,000,000
Dec. 31, 20x1 125,390 274,610 2,125,390
Dec. 31, 20x2 133,251 141,359 2,258,641
Dec. 31, 20x3 141,606 -247 2,400,247

Notice that there is still a slight difference of ₱247. However, if this is deemed immaterial, we can regard
the computed rate as the effective interest rate.