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Chapter 5
Notes Receivable

PROBLEM 1: TRUE OR FALSE

1. FALSE – interest receivable = face amount x nominal rate
2. TRUE
 (1,241,843 x 110% x 110%) = 1,502,630 carrying amount on Dec.
31, 20x2
 2M face amount - 1,502,630 = 497,370

3. TRUE
4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
5. TRUE
6. FALSE 40,000 (400,000 cash price equivalent x 10%)
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: MULTIPLE CHOICE – THEORY

1. D – a note with below-market interest rate is discounted
2. A
3. C
4. A
5. C
6. C
7. C
8. D
9. B
1st note: 6,000 x 18% = 1,080 interest income;
2nd note: (7,080 ÷ 118%) x 18% = 1,080 interest income

10. B
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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):
Interest Unearned Present
Date income interest 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
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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):
Unearned
Date Interest income interest Present value

1/1/x1 259,398 640,602

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
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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):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 759,337
12/31/x
1 250,000 91,120 158,880 600,457
12/31/x
2 250,000 72,055 177,945 422,512
12/31/x
3 250,000 50,701 199,299 223,213
12/31/x
4 250,000 26,787 223,213 -

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

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

12/31/x1
Unearned interest 91,120
Interest income 91,120
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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 26,787
Interest income 26,787

Cash 250,000
Note receivable 250,000

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

Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 913,290
12/31/x1 400,000 136,994 263,006 650,284
12/31/x2 400,000 97,543 302,457 347,827
12/31/x3 400,000 52,173 347,827 (0)
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Requirement (b):
Current portion = 302,457 (see table above)
Noncurrent portion = 347,827 (see table above)

Requirement (c):
1/1/x1
Note receivable 1,200,000
Loss 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 52,173
Interest income 52,173

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
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Requirement (a):
Collection Interest Amortizatio Present
Date s income n 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)

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 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 Amortizatio Present

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income n value
1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
(7)
12/31/x2 400,000 (6) 143,737 256,263 642,093
(8)
12/31/x3 400,000 102,735 297,265 344,827
(9)
12/31/x4 400,000 (10) 55,172 344,828 0

7. Solutions:
First step: Place the given information on the amortization table:
Collection Amortizatio
Date s Interest income n 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

Second step: Squeeze for the carrying amount of the note on

December 31, 20x1.
Collection Amortizatio
Date s Interest income n 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

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Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%

Fourth step: Squeeze for the other missing information

Collection Amortizatio
Date s Interest income n 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 -

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D
Solution:
Interest income - 20x1 (1,200,000 x 10%) 120,000
Interest income - 20x2 [(1,200,000 + 120,000) x
10%] 132,000
Total interest receivable - Dec. 31, 20x2 252,000

2. C (150K – 50K in July 1, 20x5) = 100K balance x 8% = 8,000

3. B (400,000 x PV of 1 @ 10%, n=3) = 300,526 x 10% = 30,053

4. A 480,000 carrying amount – 450,789 present value* = 30,000

loss rounded off
* (600,000 x PV of ₱1 @10%, n=3) = 450,789

5. C
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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 3,380,103
12/31/20x3 2,000,000 405,612 1,594,388 1,785,715
12/31/20x4 2,000,000 214,285 1,785,715 0

6. D Solution:
(1M ÷ 5) x PV ordinary annuity of 1 @12%, n=5 = 720,955

Collection Interest Amortizatio

PV
Date s income n
1/1/x1 720,955
12/31/x1 200,000 86,515 113,485 607,470
12/31/x2 200,000 72,896 127,104 480,366
12/31/x3 200,000 57,644 142,356 338,010
12/31/x4 200,000 40,561 159,439 178,571
12/31/x5 200,000 21,429 178,571 0

7. D Solution:

Step 1: Pro-forma amortization table

Collection Interest Amortizatio
PV
Date s income n
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1/1/x1 ?
12/31/x1 ? 86,515 ? ?
12/31/x2 ? 72,896 127,104 480,366
12/31/x3 ? ? ? ?
12/31/x4 ? ? ? ?
12/31/x5 ? ? ? ?

Step 2: Reconstruct some information

Collection Interest Amortizatio
PV
Date s income n
1/1/x1 ?
12/31/x 607,470
1 200,000 (1) 86,515 ? (2)

12/31/x 200,000 480,366

2 72,896 127,104
12/31/x 200,000 ? ?
3 ?
12/31/x 200,000 ? ? ?
4
12/31/x 200,000 ? ? ?
5

(1)
(1M face amount ÷ 5) = 200,000
(2)
(127,104 + 480,366) = 607,470
* Effective interest rate = 72,896 int. inc. in 20x2 ÷ 607,470 = 12%

Step 3: Reconstruct some more

Collection Interest Amortizatio
PV
Date s income n
1/1/x1 ?
12/31/x1 200,000 86,515 ? 607,470
12/31/x2 200,000 72,896 127,104 480,366
12/31/x3 200,000 57,644 (3) 142,356 338,010
12/31/x4 200,000 ? ? ?
12/31/x5 200,000 ? ? ?

(3)
480,366 x 12% = 57,644
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Step 4: Solve for requirement

Unpaid balance of face amount - Dec. 31, 20x3
(1M - 200K - 200K - 200K) 400,000
Carrying amount - Dec. 31, 20x3 338,010
Unamortized discount - Dec. 31, 20x3 61,990

8. C
Solution:
Initial measurement: (1M ÷ 5) x PV of an annuity due of 1 @12%, n=
5 = 807,470

Collection Amortizatio
PV
Date s Interest income n
1/1/x
1 807,470
1/1/x
1 200,000 - 200,000 607,470
1/1/x
2 200,000 72,896 127,104 480,366
1/1/x
3 200,000 57,644 142,356 338,010
1/1/x
4 200,000 40,561 159,439 178,571
1/1/x
5 200,000 21,429 178,571 0

Carrying amt. on Dec. 31, 20x1 = 480,366 + 200,000 = 680,366

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

Subsequent measurement:
Collection Interest
Date Amortization Present value
s income
Jan. 1, 20x1 1,776,492
 P a g e | 13

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

10. B
Solution:
Initial measurement:
PV of P1 @
Date Collections Present value
10%, 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:
Collection Interest Amortizatio Present
Date
s income n value
Jan. 1, 20x1 761,833
Dec. 31,
400,000 76,183 323,817 438,016
20x1
Dec. 31,
300,000 43,802 256,198 181,818
20x2
Dec. 31,
200,000 18,182 181,818 0
20x3

11. D
Initial measurement: 1,600,000 – the cash price equivalent

Trial and error:

Working equation:
 Future cash flows x PV factor at x% = PV of note
 2,370,470 x PV of 1 x% = 1,600,000
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First trial: (at 14%)

 2,370,470 x PV of 1 @ 14%, n=3 = 1,600,000

 Conclusion: The effective interest rate is 14%.

Subsequent measurement:
Interest Unearned Present
Date
income interest value
1/1/x1 770,470 1,600,000
12/31/x1 224,000 546,470 1,824,000
12/31/x2 255,360 291,110 2,079,360
12/31/x3 291,110 (0) 2,370,470

Shortcut: 1,600,000 x 114% x 114% = 2,079,360

12. C
Solution:
Initial measurement:
Present value Present
Future cash flows   factors @12%, n=3 value
3,000,00
Principal 0 0.71178 a 2,135,340
Annual interest (3M x 90,00
3%) 0 2.40183 b 216,165
Total 2,351,505
a
(PV of P1 @12%, n=3)
b
(PV of ordinary annuity of P1 @12%, n=3

Subsequent measurement:
Collectio Interes
Present
Date n of t Amortization
value
interest income
Jan. 1, 20x1 2,351,505
282,18
Dec. 31, 20x1 90,000 192,181 2,543,685
1
Dec. 31, 20x2 90,000 305,24 215,242 2,758,927
 P a g e | 15

2
331,07
Dec. 31, 20x3 90,000 241,071 2,999,999
1

13. C
Solution:
Jan. 1, 20x1 1,200,000
Interest in 20x1 (1.2M x 3%) 36,000
Interest in 20x2 [(1.2M + 36K) x 3%] 37,080
Interest in 20x3 [(1.2M + 36K + 37.080K) x 3%] 38,192
Total future cash flow 1,311,272

Alternative solution:
Face amount of note receivable 1,200,000
FV of P1 @ 3%, n=3 1.092727
Future cash flow 1,311,272

Future cash flow 1,311,272

PV of P1 @12%, n=3 0.71178
PV of note receivable – Jan. 1, 20x1 933,337

14. 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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15. B
Solution:
PV of 1 @ 12%,
  Cash flows
n=3; 4; & 5 PV
1/1/x1 - - -
1/1/x2 - - -
1/1/x3 - - -
1/1/x4 800,000 0.7117802478 569,424
1/1/x5 800,000 0.6355180784 508,414
1/1/x6 800,000 0.5674268557 453,941
Carrying amt. on Jan. 1, 20x1 1,531,779

Collection Interest Amortizatio

PV
Date s income n
1,531,77
1/1/x1 9
1,715,59
1/1/x2 - 183,813 (183,813) 2
1,921,46
1/1/x3 - 205,871 (205,871) 3
1,352,03
1/1/x4 800,000 230,576 569,424 9
1/1/x5 800,000 162,245 637,755 714,284
1/1/x6 800,000 85,714 714,286 (2)
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PROBLEM 5: 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 6: FOR CLASSROOM DISCUSSION

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

Requirement (a):
Interest Unearned Present
Date income interest 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

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
 P a g e | 19

2. Solutions:

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

Requirement (a):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 248,685
12/31/x
1 100,000 24,869 75,131 173,554
12/31/x
2 100,000 17,355 82,645 90,909
12/31/x
3 100,000 9,091 90,909 0

Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 90,909 (see table above)

Requirement (c):
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

OR
Unearned interest on 12/31/x1 = Interest income in 20x2 and 20x3:
(17,355 + 9,091) = 26,446

Requirement (d):
1/1/x1
Note receivable 300,000
Accum. depreciation 700,000
Loss 51,315
Unearned interest (300,000 – 248,685) 51,315
Equipment 1,000,000
 P a g e | 20

12/31/x1
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

Requirement (e):
Interest income 24,869
Loss on sale of equipment (51,315)
Net effect on P/L - decrease (26,446)

3. 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):
Collection Interest Amortizatio Present
Date s income n value
1/1/x1 1,094,215
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1/1/x1 400,000 - 400,000 694,215

1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 36,363 363,637 (0)

Requirement (b):
69,422 – see table above.

Requirement (c):
363,63
Carrying amt. on 1/1/x2
7
400,00
Add back: Collection on 1/1/x2
0
763,63
Carrying amt. on 12/31/x1
7