On April 1, 2016, Shalimar Company discounted with recourse a 9-month, 10% note dated January 1,

2016 with face of 6,000,000. The bank discount rate is 12%. The discounting transaction is accounted for
a conditional sale with recognition of contingent liability. On October 1, 2020, the maker dishonored the
note receivable. The entity paid the bank the maturity value of the note plus protest fee of P50,000. On
December 31, 2016, the entity collected the dishonored note receivable in full plus 12% annual interest on
the total amount due.

1. What is the total amount collected from the customer on December 31, 2020?

а. 6,450,000

b. 6,500,000

c. 6,695,000

d. 6,662,500

SOLUTION:

Principal 6,000,000

Add: Interest at 10% for 9 months 450,000

Protest charges 50,000

Total receivable 6,500,000

Add: Interest at 12% for 3 months 195,000

December 31, 2020 Amount collected 6,695,000

2. If the discounting is secured borrowing, what is included in the journal entry to record the
transaction?

a. Debit loss on note receivable discounting P87,000

b. Debit interest expense P87,000

c. Credit liability for note discounted P6,063,000

d. Credit interest income P63,000

SOLUTION:

Cash 6,063,000

Interest Expense 87,000

To Liability for note receivable discounted 6,000,000

To Interest revenue 150,000