Test Bank Notes Receivable

Easy

1. It is an asset account tied to an underlying promissory note, which details in writing the payment
terms for a purchase between a “payee” (typically a company, and sometimes called a creditor)
and the “maker” of the note (usually a customer or employee, and sometimes called a debtor).
a. Prepaid Interest c. Notes Receivable
b. Accounts Receivable d. Accrued Interest Receivable
2. Trust Worthy Bank accepts a promissory note for $6,000 from a customer on November 1, to be
repaid in eight months plus 6% interest. The maturity value of the note is:

a. $6,240. b. $6,140. c. $6,075. d. $6,000.

3. What is the due date of a $12,000, 90-day, 8% note receivable dated August 5?
a. October 31 b. November 2 c. November 3 d. November 4
4. A note receivable not renewed or collected at maturity is considered a
a. Discounted Notes c. Accounts Receivable
b. Dishonored Notes d. Notes Payable
5. The date on which a note is to be paid
a. Maturity date c. December 25
b. Due date d. all of the above
6. The total proceeds of a promissory note, including principal and interest, at the maturity date
a. present value c. interest income
b. face amount d. Maturity value
7. What is Non-interest bearing note ?
a. It is a Note receivable without interest
b A note that makes no provision for interest
c. Collective term for promissory notes held by the entity to whom payment is promised (payee)
d. none of the above
8. A method of selling notes receivable in which the bank deducts the interest from the maturity
value of the note to determine the proceeds.
a. Discounting c. Factoring
b. Interest Revenue d. Notes receivable
9. On September 1, of the Current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire amount of the
interest are due August 30 of next year. The interest Receivable on December 31 of the current
year would consist of an amount Representing
a. Four Months of accrued Interest c. Twelve Months of accrued Interest
b. Eight Months of accrued Interest d. The excess on September 1 of the present value of the
note receivable over face amount.
10. It is the sum of all future cash flows discounted using the prevailing market rate of interest for
similar notes
a. Interest Income c. Interest Revenue
b. Present Value d .Face Amount
Average

1. Kopiko Company sold to another entity a building costing $3,600,000 for $5,000,000 on
January 1 2020.

The buyer paid $1,000,000 down and signed a two-year promissory note for the remainder of
the purchase plus 15% interest compounded annually. The notes mature on January 1, 2022.

Required:

1. Prepare Journal entries for 2020,2021,2022

2. Orions Company manufactures and sells Laptops. On January 1,2020, the entity sold an
laptop costing 400,000 for 700,000.

The buyer paid 100,000 down and signed a 600,000 noninterest bearing note payable in three
equal installments every December 31.

The prevailing interest rate for a note of this type is 15%,The present value of an ordinary
annuity of 1 for three period is 2.2832

Required:

2. Prepare journal entries for the current year

3. Determine the Carrying amount of the note on December 31, 2021
4. Determine the income Interest for 2022

For no.3-6

On January 1,2010, Watermelon Company sold an Equipment with a Carrying amount of

1,200,000, receiving a non-interest bearing note due in Three Years with a face amount of
1,500,000. There is no established market value for the equipment.

The interest rate on similar obligations is 10% . The present value of 1 at 10% for three Period is
.7513

3. What should be reported as gain or loss on sale of equipment in 2010?

a. 300,000 gain c. 73,050 gain

b,300,000 loss d. 73,050 loss

4. What amount should be reported as interest income for 2010?

A. 150,000 c. 112,695

b. 120,000 d.73,050

5.What is the carrying amount of note receivable on December 31,2010

A.1,014,225 c.1,239,645

b. 1,126,950 d.1,300,000

6.What should be reported as interest income for 2011

a.123,964.5 c.101,422.5

b.130,000 d.120,000

For 7-10

On December 31,2020, Dipdip Company sold an Equipment with carrying amount of 5,000,000
and Received a non-interest bearing note requiring payment of 1,200,000 annually for 10 years.
The first payment is due December 31,2021.

The prevailing rate of interest for this type of note at date of issuance is 14%.

PV of 1 at 14% for 10 periods .2697

PV of an ordinary annuity of 1 at 14% for 10 periods 5.2161

7. On December 31, 2020, what is the carrying amount of the note receivable?

a.12,000,000 c.6,259,320

b.5,740,680 d.1,348,500

8.What amount should be recognized as gain on sale of equipment in 2020?

a.7,000,000 c. .5,740,680

b.1,259,320 d.6,259,320

9. What amount of interest income should be recognized for 2021

a. 876,305 c. 1,000,000

b.1,680,000 d. 980,000

10. What is the carrying amount of the note receivable on December 31,2021

a.10,800,000 c.8,000,000

b.6,259,320 d.5,935,625

Hard
On January 1, 2020, Mythical Company had the following account balances:

Note Receivable from sale of an idle building 9,000,000

Note Receivable from an officer 3,000,000

The 9,000,000 note receivable is dated July 1,2019, bears interest at 9% and
represents the balance of the consideration received from the sale of an idle building to
Legend Company.

Principal payments of 3,000,000 plus interest are due annually beginning July 1, 2020.
Legend Company made the first principal and interest payment on July 1, 2020

The 3,000,000 note receivable is dated December 31, 2017, bears interest at 8% and is
due on December 31, 2022

The note is due form the president of Mythical Company Interest is payable annually on
December 31 and all interest payments were made through December 31, 2020.

On September 1, 2020, Mythical Company sold a parcel of land to Epic Company for
5,000,000 under an installment sale contract.

Epic Company made a 2,000,000 down payment on September 1,2020, and Signed a
4-year 10% note for the 3,000,000 balance.

The Equal annual payments of principal and interest on the note totaled 940,000,
payable on September 1 of each year from 2021 through 2024.

The fair value of the land at the date of sale was 5,000,000 and the cost of the land was
4,000,000.

Required:

1. Prepare Journal entries to record all indicated transactions for 2020.

2.Determine the amount of notes receivable including accrued interest that should be
classified as current asset on December 31, 2020

3.Determine the amount of notes receivable including accrued interest that should be
classified as non-current asset on December 31, 2020
Answer Key

Easy

1. c
2. a
3. d
4. b
5. a
6. d
7. b
8. a
9. a
10. b

Average

NO.1

1/1/2020 Cash 1,000,000

Note Receivable 4,000,000

Land 3,000,000

Gain on Sale of land 2,000,000

12/31/2020 Accrued Interest Rec. 600000

Interest Income 600000

(4,000,000*15%)

12/31/2021 Accrued Interest Rec. 690000

Interest Income 690000

(4,600,000*15%)

1/1/2022 Cash 5,290,000

Notes Receivable 4,000,000

Accrued Interest Rec. 1,290,000

AVERAGE NO.2
1/1/2020 Cash 100000
Note Receivable 600000
Sales 556640
Unearned interest income 143360

12/31/2020 Cash 200000

Notes Receivable 200000

Unearned interest income 68496

Interest Income 68496

Annual interest principal pv

payment income
456640
2020 200000 68496 131504 325136
2021 200000 48770.4 151229.6 173906.4
2022 200000 26093.6 173906.4
143360 456640

2021 2022
NR 400000 200000
unearned int inc. 74864 26093.6
nr CA 325136 173906.4
no.3
Face Ammount of Note 1500000
Less:Present Value (1500000*.7513) 1126950
Unearned Interest income 373050

Present Value of note 1126950

Less:Carrying Ammount 1200000
Gain/loss on sale of Equipment -73050

PV of Note 1126950
Interest rate 10%
Interest income 112695
Interest Income Unearned Interest Present Value
Date
1/1/2010 373050 1126950
12/31/2010 112695 260355 1239645
12/31/2011 123964.5 136390.5 1363609.5
12/31/2012 136360.95 xxx 1499970.45
no.4
12,000,00
FA of note 0
PV of note 6259320
(1200000*5.2161)
unearned interest income 5,740,680

625932
PV of Note/Sale Price 0
less:Carrying amount of 500000
Equipment 0
125932
Gain on sale of equipment 0

Annual Interest Principa Present

Date Collection income l Value
12/31/202
0 6259320
12/31/202
1 1,200,000 876304.8 323,695 5,935,625
12/31/202
2 1,200,000
12/31/202
3 1,200,000
Hard Answer Key
Legend
7/1/2020 Notes Receivable 12/31/20 6,000,000
Cash 3,810,000 Due on May 1, 2021 2,500,000 CA
Notes Receivable 3,000,000 Due on May 1, 2022 2,500,000 NCA
Interest income 405000 Accrued interest Rec. 270,000 CA
Accrued interest rec. 405000

12/31/2020 Accrued interest rec, 270000

Interest income 270000

President Notes Receivable due on 12/31/22 3,000,000 NCA

12/31/2020 Cash 240000
Interest income 24000

Epic
9/1/2020 Cash 2000000 Notes Receivable 12/31/20 3,000,000
Notes Receivable 3000000 due on 9/1/21 640000 CA
Land 4000000 2360000 NCA
Gain on sale of land 1000000
Accrued Interest rec. 200000 CA
12/31/2020 Accrued interest rec, 100000
Interest income 100000

100000
810000

7/1/2019 N/R 9000000

land ??

12/31/2019 accrued interest receivable 405000

interest income 405000

CA 3,610,000

NCA7,860,000