Chapter 5

Notes Receivable

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
3. TRUE
4. TRUE
5. TRUE
6. FALSE 40,000
7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000
8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 +
9,000) x 10% = 9,900
9. FALSE 850,000 (the note is collectible in installments)
10. TRUE

PROBLEM 2: CLASSROOM DISCUSSION

1. A

2. C

3. Solutions:
Initial measurement:
₱133,100 x PV of ₱1 @10%, n= 3 = ₱100,000

Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 33,100 100,000
12/31/x1 10,000 23,100 110,000
12/31/x2 11,000 12,100 121,000
12/31/x3 12,100 - 133,100

Requirement (b):
1/1/x1
Note receivable 133,100
Unearned interest 33,100
Land 100,000

12/31/x1
Unearned interest 10,000
Interest income 10,000

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12/31/x2
Unearned interest 11,000
Interest income 11,000

12/31/x3
Unearned interest 12,100
Interest income 12,100

12/31/x3
Cash 133,100
Note receivable 133,100

4. C

5. Solutions:
Initial measurement:
₱100,000 x PV ordinary annuity of ₱1 @10%, n=3 = ₱248,685

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 248,685
12/31/x1 100,000 24,869 75,132 173,554
12/31/x2 100,000 17,355 82,645 90,909
12/31/x3 100,000 9,091 90,909 (0)

Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 173,554 (see table above)

Requirement (c):
Interest income in 20x2 and 20x3: (17,355 + 9,091) = 26,446

OR
Outstanding balance of face amount (100K x 2) 200,000
Carrying amt. on 12/31/x1 (173,554)
Unearned interest on 12/31/x1 26,446

Requirement (d):
1/1/x1
Note receivable 300,000
Accum. depreciation 700,000
Loss (squeeze) 51,315
Unearned interest (300,000 – 248,685) 51,315
Equipment 1,000,000

12/31/x1
2
Unearned interest 24,869
Interest income 24,869

Cash 100,000
Note receivable 100,000

12/31/x2
Unearned interest 17,355
Interest income 17,355

Cash 100,000
Note receivable 100,000

12/31/x3
Unearned interest 9,091
Interest income 9,091

Cash 100,000
Note receivable 100,000

6. D

7. Solutions:
Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,421 330,579 363,636
1/1/x3 400,000 36,364 363,636 (0)

Requirement (b):
69,421 – see table above.

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PROBLEM 3: EXERCISES
1. Solutions:
Initial measurement:
₱1,000,000 x PV of ₱1 @14%, n= 4 = ₱592,080

Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 407,920 592,080
12/31/x1 82,891 325,029 674,971
12/31/x2 94,496 230,533 769,467
12/31/x3 107,725 122,807 877,193
12/31/x4 122,807 0 1,000,000

Requirement (b):
1/1/x1
Note receivable 1,000,000
Unearned interest 407,920
Land 500,000
Gain 92,080

12/31/x1
Unearned interest 82,891
Interest income 82,891

12/31/x2
Unearned interest 94,496
Interest income 94,496

12/31/x3
Unearned interest 107,725
Interest income 107,725

12/31/x4
Unearned interest 122,807
Interest income 122,807

Cash 1,000,000
Note receivable 1,000,000

2. Solutions:
Initial measurement:
₱900,000 x PV of ₱1 @12%, n= 3 = ₱640,602

Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 259,398 640,602

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12/31/x1 76,872 182,526 717,474
12/31/x2 86,097 96,429 803,571
12/31/x3 96,429 0 900,000

Requirement (b):
1/1/x1
Note receivable 900,000
Accum. depn. 400,000
Loss 159,398
Unearned interest 259,398
Machinery 1,200,000

12/31/x1
Unearned interest 76,872
Interest income 76,872

12/31/x2
Unearned interest 86,097
Interest income 86,097

12/31/x3
Unearned interest 96,429
Interest income 96,429

12/31/x3
Cash 900,000
Note receivable 900,000

3. Solution:
Initial measurement:
₱250,000 x PV of ₱1 @14%, n= 4 = ₱759,337

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 759,337
12/31/x1 250,000 91,120 158,880 600,457
12/31/x2 250,000 72,055 177,945 422,512
12/31/x3 250,000 50,701 199,299 223,214
12/31/x4 250,000 26,786 223,214 -

Requirement (b):
Current portion = 177,945 (see table above)
Noncurrent portion = 422,512 (see table above)

Requirement (c):

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1/1/x1
Note receivable 1,000,000
Loss (squeeze) 240,663
Unearned interest (1M – 759,337) 240,663
Land 1,000,000

12/31/x1
Unearned interest 91,120
Interest income 91,120

Cash 250,000
Note receivable 250,000

12/31/x2
Unearned interest 72,055
Interest income 72,055

Cash 250,000
Note receivable 250,000

12/31/x3
Unearned interest 50,701
Interest income 50,701

Cash 250,000
Note receivable 250,000

12/31/x4
Unearned interest 26,786
Interest income 26,786

Cash 250,000
Note receivable 250,000

4. Solution:
Initial measurement:
₱400,000 x PV of ₱1 @15%, n= 3 = ₱913,290

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 913,290
12/31/x1 400,000 136,994 263,006 650,284
12/31/x2 400,000 97,543 302,457 347,826
12/31/x3 400,000 52,174 347,826 (0)

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Requirement (b):
Current portion = 302,457 (see table above)
Noncurrent portion = 347,826 (see table above)

Requirement (c):
1/1/x1
Note receivable 1,200,000
Loss (squeeze) 86,710
Unearned interest (1.2M – 913,290) 286,710
Land 1,000,000

12/31/x1
Unearned interest 136,994
Interest income 136,994

Cash 400,000
Note receivable 400,000

12/31/x2
Unearned interest 97,543
Interest income 97,543

Cash 400,000
Note receivable 400,000

12/31/x3
Unearned interest 52,174
Interest income 52,174

Cash 400,000
Note receivable 400,000

5. Solution:
Initial measurement:
(300,000 x PV of an annuity due of 1 @9%, n=3) = 827,733

Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 827,733
1/1/x1 300,000 - 300,000 527,733
1/1/x2 300,000 47,496 252,504 275,229
1/1/x3 300,000 24,771 275,229 (0)

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Requirement (b):
Interest income in 20x1 = 47,496 (see table above)

Requirement (c):

1/1/x1
Cash 100,000
Note receivable 900,000
Unearned interest (900K – 827,733) 72,267
Land 800,000
Gain (squeeze) 127,733

1/1/x1
Cash 300,000
Note receivable 300,000

12/31/x1
Unearned interest 47,496
Interest income 47,496

6. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Unearned interest at initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years

Date Collections Interest income Amortization Present value

1/1/x1 1,119,272
12/31/x1 400,000 179,084 220,916 898,356
12/31/x2 400,000 143,737 256,263 642,093
12/31/x3 400,000 102,735 297,265 344,827
12/31/x4 400,000 55,172 344,828 0

7. Solutions:
First step: Place the given information on the amortization table:
Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000

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Second step: Squeeze for the carrying amount of the note on December 31,
20x1.
Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 720,549*
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000
12/31/x4 300,000

* (213,534 + 507,015) = 720,549

Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%

Fourth step: Squeeze for the other missing information

Date Collections Interest income Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 109,345 190,655 720,549
12/31/x2 300,000 86,466 213,534 507,015
12/31/x3 300,000 60,842 239,158 267,857
12/31/x4 300,000 32,143 267,857 -

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PROBLEM 4: CLASSROOM ACTIVITIES

ACTIVITY 1:
The learners perform the activity, grade themselves, and then pass their
scores to the teacher for recording.

ACTIVITY 2:
The learners perform the activity, grade themselves, and then pass their
scores to the teacher for recording.

ACTIVITY 3:
The learners perform the activity and then pass their printed work to the
teacher for grading.

ACTIVITY 4:
The learners perform the activity and then pass their printed work to the
teacher for grading.

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PROBLEM 5: MULTIPLE CHOICE - THEORY
1. D 6. D 11. A
2. B 7. D 12. B
3. D 8. C 13. C
4. B 9. C 14. D
5. C 10. C 15. A

PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL

1. B (400,000 x .75) = 300,000 x 10% = 30,000
2. A (60,000 x PV annuity due @10%, n=7) = 321,600 rounded off
3. B (600,000 x PV of ₱1 @10%, n=3) = 450,789 x 10% = 45,000
rounded off
4. A 480,000 carrying amount – 450,789 present value = 30,000
loss rounded off
5. D Maxx note (10,000 x 1.1593 Future Value of ₱1 @3%, n=5) =
11,593 future value x .680 = 7,883. The answer choice is rounded
off
6. C (150K – 50K in July 1, 20x5) = 100K balance x 8% = 8,000
7. C (500,000 x 12% x 2/12) = 10,000
8. B (5,009 x 5) = 25,045 total cash flows from the note receivable
less 19,485 present value = 5,560
9. C (10,000 x PV of an annuity due of ₱1 @8%, n=10) = 72,468
less 10,000 first installment on Dec. 30, 20x4 = 62,469. Answer
choice is rounded-off
10. C
Solution:
The equal annual year-end payments are computed as follows:
PV = Cash Flow x PVF
20,000 = Cash Flow x PV ordinary annuity of 1 @8%, n=5
20,000 = Cash Flow x 3.993
Cash Flow = 20,000 ÷ 3.9927
Cash Flow = 5,009

Total cash flow = 5,009 x 5 years = 25,045

Less: Present value (5,009 x PV ordinary annuity @9%, n=5) =
19,483
Total interest revenue = 5,561 (Answer choice is rounded-off)

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