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Quiz 1 on Mid Term Period – Notes Receivable

ADAPTED: Conrado T. Valix, Jose F. Peralta, & Christian Aris M. Valix, Intermediate Accounting,
Volume 1, 2020 Edition

MULTIPLE CHOICE: ( 30 points )

The following information pertains to Nos. 1 to 4:

On December 31, 2020, Precious Company sold an equipment with carrying amount of P2,000,000 and
received a non interest bearing note requiring payment of P500,000 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

The following information pertains to Nos. 5 to 8:

On December 31, 2020. Chang Company sold a machine in the ordinary course of business to Door
Company in exchange for a non interest bearing note requiring ten annual payments of P1,000,000.

The entity made the first payment on December 31, 2020. The market interest rate for similar notes at
date of issuance was 8%.

PV of an ordinary annuity of 1 at 8% for 9 periods 6.25

5. What is the amount of sales revenue?

a. 7,250,000

b. 5,000,000

c. 6,250,000

d. 8,000,000

6. On December 31, 2020, what is the carrying amount of the notes receivable?

a. 4,500,000

b. 4,600,000

c. 6,250,000

d. 6,710,000

7. What amount should be reported as interest income for 2021?

a. 580,000

b. 720,000

c. 500,000
 d. 625,000

8. What is the carrying amount of the notes receivable on December 31, 2021?

a. 8,000,000

b. 6,750,000

c. 5,250,000

d. 5,750,000

The following information pertains to Nos. 9 and 10:

On January 1, 2020, Akin Company sold equipment with a carrying amount of P4,800,000 in exchange
for a P6,000,000 non interest bearing note due January 1, 2023. There was no established exchange
price for the equipment.

The prevailing rate of interest for a similar note was 10%.

The present value of 1 at 10% for three periods is 0.75.

9. What amount should be reported as interest income for 2020?

a. 600,000

b. 500,000

c. 450,000

d. 400,000

10. What amount should be reported as gain or loss on sale of equipment for 2020?

a. 1,200,000 gain

b. 2,700,000 gain

c. 300,000 gain

d. 300,000 loss