PRACTICE PROBLEMS – NOTES AND LOANS RECEIVABLE

GENERAL INSTRUCTIONS:
1.) This activity is a group. You can have a maximum of 3 members in a group.
2.) Submit only one set of answers and solutions per group. Don’t forget to place the group
members’ name in your file.
3.) For PV factors, use four decimal places. Example, 1.2222 or 0.1234.
4.) For amortization schedules, round of all amounts to whole number.
5.) For final answers, round them off to whole number.

PROBLEM #1
EB Bank granted a loan to a borrower on January 1, 2019. The interest on the loan is 10% payable
annually starting December 31, 2019. The loan matures in three years on December 31, 2021. The
principal amount of loan is P3,500,000. In addition, direct origination cost incurred amounted to
P70,000, and indirect origination cost incurred, P35,000. Finally, origination fee charged against the
borrower amounted to P238,000.
a) Compute for the carrying amount of the loan receivable on January 1, 2019.
b) The new effective rate after considering the origination fees and costs incurred is 12%. Prepare
a table of amortization for the loan receivable.
c) Prepare journal entries for 2019 and 2021.

PROBLEM #2
On December 31, 2019, FJ Company sold for P2,400,000 an old equipment having an original cost of
P4,320,000 and carrying amount of P1,920,000. The terms of the sale were P480,000 down payment
and P960,000 payable on December 31 of the next two years. The sale agreement made no mention
of interest. However, 9% would be a fair rate for this type of transaction. Compute for the following:
a) Gain/Loss on sale of equipment (Specify if gain or loss.)
b) Interest income for 2020
c) Carrying amount of the note receivable on December 31, 2020.

PROBLEM #3
On December 31, 2019, AB Company received two P600,000 notes receivable from customers in
exchange for services rendered. On both notes, interest is calculated on the outstanding principal
balance at the annual rate of 3% and payable at maturity. The note from R01 Company is due in nine
months and the note from R02 Company is due in five years. The market interest rate for similar
notes on December 31, 2019 was 8%.
a) At what amount should the notes receivable be reported on Dec. 31, 2019 for R01 Company?
b) At what amount should the notes receivable be reported on Dec. 31, 2019 for R02 Company?

PROBLEM #4
On June 30, 2020, AM Company accepted a customer’s P750,000 noninterest-bearing six-month
note in a sale transaction. The product sold normally sells for P690,000. What amount should be
reported as interest income for the year ending December 31, 2020?
PROBLEM #5
RZ Company is a dealer of equipment. On December 31, 2019, the entity sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P600,000. The first
payment shall be made on December 31, 2020. The market interest rate for similar notes was 8%.
Compute for the following:
a) Carrying amount of the note receivable on December 31, 2019
b) Interest income reported for 2020
c) Unearned interest income as of December 31, 2021
d) Carrying amount of the note receivable on December 31, 2021.

PROBLEM #6
CD Company has an 8% note receivable dated June 30, 2019, in the original amount of P1,050,000.
Payments of P350,000 in principal plus accrued interest are due annually on July 3, 2020, 2021, and
2022. In the June 30, 2021 statement of financial position, what amount should be reported as a
current asset for interest on the note receivable?

PROBLEM #7
BC Bank loaned P3,600,000 to a borrower on January 1, 2019. The terms of the loan were payment in
full on January 1, 2024, plus annual interest payment at 12%. The interest payment was made as
scheduled on January 1, 2020. However, due to financial setbacks, the borrower was unable to make
the 2021 interest payment. The bank considered the loan impaired and projected the cash flows from
the loan on December 31, 2021. The bank has accrued the interest on December 31, 2020, but did not
continue to accrue interest for 2021 due to the impairment of the loan. The projected cash flows are:
Amount projected on
Date of cash flow
December 31, 2021
December 31, 2022 P 600,000
December 31, 2023 P 800,000
December 31, 2024 P1,000,000
December 31, 2025 P1,200,000
Compute for the following:
a) Present value of cash flows
b) Impairment loss for 2021
c) Interest income for 2022
d) Carrying amount of the loan receivable on December 31, 2022

PROBLEM #8
HD Company sold an equipment with a carrying amount of P1,120,000, receiving a noninterest-
bearing note due in three years with a face amount of P1,400,000. There is no established market
value for the equipment. The interest rate on similar obligations is estimated at 12%.
a) What amount should be reported as gain or loss on sale of equipment? (Specify if gain or loss.)
b) What amount should be reported as interest income for the first year?