ACTIVITY CHAPTER 4

1. On March 1, 20X4, Fine Co. borrowed ₱10,000 and signed a two-year note
bearing interest at 12% per annum compounded annually. Interest is payable in full
at maturity on February 28, 20X6. What amount should Fine report as a liability for
accrued interest at December 31, 20X5?

Ans. 2,320
Solution:
Interest expense in 20x4 (10,000 x 12% x 10/12) 1,000
Interest expense in 20x5 [(10,000 + 1,000) x 12%] 1,320
Interest payable (compounded) - 12/31/x5 2,320

2. On December 30, 20X6, Bart, Inc., purchased a machine from Fell Corp. in
exchange for a noninterest bearing note requiring eight payments of ₱20,000. The
first payment was made on December 30, 20X6, and the others are due annually on
December 30. At the date of issuance, the prevailing rate of interest for this type of
note was 11%. On Bart's December 31, 20X6, balance sheet, the note payable to
Fell was

Ans. 94,240
Solution:

Cash flow 20,000

PV of annuity due of 1 @11%, n=8 5.712
PV of note on Dec. 30, 20x6 114,240
Less: First installment on Dec. 31, 20x6 (20,000)
PV of note on Dec. 31, 20x6 94,240

3. House Publishers offered a contest in which the winner would receive ₱1,000,000,
payable over 20 years. On December 31, 2000, House announced the winner of the
contest and signed a note payable to the winner for ₱1,000,000, payable in ₱50,000
installments every January 2. Also on December 31, 2000, House purchased an
annuity for ₱418,250 to provide the ₱950,000 prize monies remaining after the first
₱50,000 installment, which was paid on January 2, 2001.

In its December 31, 20x0, balance sheet, what amount should House report as note
payable-contest winner, net of current portion?

Ans. 418,250
Solution:
418,250 – The cash price equivalent of the annuity purchased

4. House Publishers offered a contest in which the winner would receive ₱1,000,000,
payable over 20 years. On December 31, 2000, House announced the winner of the
contest and signed a note payable to the winner for ₱1,000,000, payable in ₱50,000
installments every January 2. Also on December 31, 2000, House purchased an
annuity for ₱418,250 to provide the ₱950,000 prize monies remaining after the first
₱50,000 installment, which was paid on January 2, 2001.

In its 20x0 income statement, what should House report as contest prize expense?

Ans. 468,250
Solution:
(418,250 + 50,000 first payment made immediately) = 468,250 total contest
prize expense

5. On December 1, 20x5, Money Co. gave Home Co. a ₱200,000, 11% loan. Money
paid proceeds of ₱194,000 after the deduction of a ₱6,000 non-refundable loan
origination fee. Principal and interest are due in 60 monthly installments of ₱4,310,
beginning January 1, 20x6. The repayments yield an effective interest rate of 11% at
a present value of ₱200,000 and 12.4% at a present value of ₱194,000. What
amount of income from this loan should Money report in its 20x5 income statement?

Ans. 2,005
Solution:
(194,000 x 12.4% x 1/12) = 2,005