REVIEW 124

NOEMI JANE O. DINSAY

What is imputed interest?

a.Interest based on the stated interest rate

b.Interest based on the implicit interest rate
c.Interest based on the average interest rate
d.Interest based on the bank prime interest
rate
B. Interest based
on the implicit
interest rate
Accounting for the interest in a noninterest
bearing note receivable is an example of what
accounting theory?

a. Matching
b.Verifiability
c. Substance over form
d.Form over substance
C. Substance
over form
On July 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 in one year. The interest receivable account
would show a balance on

a. July 1 but not December 31

b. December 31 but not July 1
c. July 1 and December 31
d. Neither July nor December 31
B. December
31 but not
July 1
Subsequent to initial recognition, a loan receivable
shall be measured at

a. Cost
b.Amortized cost using straight line method
c. Amortized cost using effective interest method
d. Fair value
C. Amortized
cost using
effective
interest
method
In calculating the carrying amount of the loan
receivable, the lender adds to the principal
I. Direct origination cost
II. Indirect origination cost
III. Origination fee charged to borrower

a. I only
b. I and II only
c. I and III only
d. I, II and III
a. I only
Which of the following is not an objective evidence of
impairment of a financial asset?

a. Significant financial difficulty of the issuer

b. A decline in the fair value of the financial asset below the
previous carrying amount
c. A breach of contract, such as a default or delinquency in
interest or principal payment
d. The lender for economic or legal reason relating to the
borrower’s financial difficulty, grants to the borrower a
concession that the lender would not otherwise consider.
b.A decline in the fair
value of the financial
asset below the previous
carrying amount
If there is evidence that an impairment loss on loan receivable has
been incurred, the loss is equal to the

a. Excess of the carrying amount of the loan receivable over the

present value of the cash flows related to the loan
b. Excess of the present value of cash flows related to the loan
over the carrying amount of the loan receivable
c. Excess of the carrying amount of the loan over the principal
amount of the loan
d. Excess of the principal amount of the loan over the carrying
amount
a. Excess of the
carrying amount of the
loan receivable over
the present value of
the cash flows related
to the loan
At initial recognition, an entity shall measure a loan receivable at

a. Cost
b. Amortized cost
c. Fair value
d. Fair value plus transaction cost that are directly attributable to the
acquisition of the asset
At initial recognition, an entity shall measure a loan receivable at

a. Cost
b. Amortized cost
c. Fair value
d. Fair value plus transaction cost that are directly attributable to the
acquisition of the asset
Dinsay Company had the following bank reconciliation on March 31 of the current year:

Balance per bank statement, March 31 4,650,000

Add: Deposits in transit 1,000,000
Total 5,650,000
Less: Outstanding checks 1,250,000
Balance per book, March 31 4,400,000

Data per bank statement for the month of April follow:

Deposits 6,000,000
Disbursements 5,000,000

All reconciliation items on March 31 cleared through the bank in April. Outstanding checks on
April 30 totaled P750,000 and deposits in transit amounted to P1,500,000. What is the amount
of cash receipts per book in April?
 
Bank receipts for April 6,000,000
Deposit in transit – March 31 (1,000,000)
Deposit in transit – April 30 1,500,000
Book receipts for April 6,500,000
Ako Bank loaned P5,000,000 to Ikaw Company on January 1, 2014. The terms of
the loan require principal payments of P1,000,000 each year for 5 years plus
interest at 8%. The first principal and interest payment is due on January 1, 2015.
Ikaw Company made the required payments during 2015 and 2016. However,
during 2016 Ikaw Company began to experience financial difficulties, requiring Ako
Bank to reassess the collectibility of the loan. On December 31, 2016, Ako bank
has determined that the remaining principal payment will be collected but the
collection of interest is unlikely. Ako bank did not accrue the interest on December
31, 2016. The present value of 1 at 8% is as follows:

For one period 0.926

For two periods 0.857
For three periods 0.794

What is the loan impairment on December 31, 2016?

January 1, 2017collection (1,000,000 X 1.000) 1,000,000
January 1, 2018 collection (1,000,000 X 0.926) 926,000
January 1, 2019 collection (1,000,000 X 0.857) 857,000
Total present value of loan 2,783,000

Loan receivable 3,000,000

Present value of loan 2,783,000
Impairment loss 217,000

Entry:

Impairment loss 217,000

Allowance for loan impairment 217,000
Ako Bank loaned P5,000,000 to Ikaw Company on January 1, 2014. The terms of
the loan require principal payments of P1,000,000 each year for 5 years plus
interest at 8%. The first principal and interest payment is due on January 1, 2015.
Ikaw Company made the required payments during 2015 and 2016. However,
during 2016 Ikaw Company began to experience financial difficulties, requiring Ako
Bank to reassess the collectibility of the loan. On December 31, 2016, Ako bank
has determined that the remaining principal payment will be collected but the
collection of interest is unlikely. Ako bank did not accrue the interest on December
31, 2016. The present value of 1 at 8% is as follows:

For one period 0.926

For two periods 0.857
For three periods 0.794

What is the interest income to be reported in 2017?

Solution:

Loan receivable 3,000,000

Collection on January 1, 2017 (1,000,000)
Loan receivable – January 1. 2017 2,000,000
Allowance for loan impairment (217,000)
Carrying amount – January 1. 2017 1,783,000

Interest income for 2017 (1,783,000 X 8%) 142,640

CPA Bank granted a 10-year loan to Matalino Company in the amount of
P1,500,000 with a stated interest rate of 6%. Payments are due monthly and
are computed to be P16,650. CPA bank incurred P40,000 of direct loan
origination cost and P20,000 of indirect loan origination cost. In addition,
CPA Bank charged Matalino Company a 4-point refundable loan origination
fee.
 
What is the initial carrying amount of the loan receivable on the part of CPA
Bank?
Solution:

Loan receivable 1,500,000

Direct origination cost 40,000
Total 1,540,000
Origination fee received from the borrower (1,500,000 X 4%) (60,000)
Carrying amount 1,480,000
CPA Bank granted a 10-year loan to Matalino Company in the amount of
P1,500,000 with a stated interest rate of 6%. Payments are due monthly and
are computed to be P16,650. CPA bank incurred P40,000 of direct loan
origination cost and P20,000 of indirect loan origination cost. In addition,
CPA Bank charged Matalino Company a 4-point refundable loan origination
fee.
 
What is the initial carrying amount of the loan payable on the part of Matalino
Company?
Solution:

Loan payable 1,500,000

Origination fee charged by the bank (60,000)
Carrying amount 1,440,000
On December 31 ,2016, Rose Laillote Company sold a machine to Gene Vibe Company in exchange for a
noninterest bearing not requiring ten annual payments of P100,000. Gene Vibe made the first payment on
December 31, 2016. The market rate of interest for similar notes at date of issuance was 8%. Information on
present value factors is:

Period Present value of 1 at 8% Present value of ordinary

Annuity of 1 at 8%

9 0.50 6.25
10 0.46 6.71

In the December 31, 2016 statement of financial position, what is the carrying amount of the note
receivable?
Solution:
The note receivable is shown at present value on December 31, 2016.

Face value – remaining nine payments (100,000 X 9) 900,000

Present value (100,000 X 6.25) 625,000
Unearned interest income 275,000
On June 30, 2016, Angel Company sold goods for
P5,000,000 and accepted the customer’s 10% one-
year note in exchange. The 10% interest rate
approximates the market rate of return. What
amount should be reported as interest income for
the year ended December 31, 2016?
Solution:

Interest income from July 1

to December 31, 2016
(10% X 5,000,000 X 6/12) 250,000
Davao Company is a dealer in equipment on December 31, 2016,
the entity sold an equipment in exchange for noninterest bearing
note requiring five annual payments of P500,000. The first payment
was made on December 31, 2017. The market interest for similar
notes was 8%. The PV of 1 at 8% for 5 periods is 0.68, the PV of an
ordinary annuity of 1 at 8% for 5 periods is 3.99.

On December 31, 2016, what is the carrying amount of the note

receivable?
Solution:

Present value of note receivable

(500,000 X 3.99) 1,995,000
Davao Company is a dealer in equipment on December 31, 2016,
the entity sold an equipment in exchange for noninterest bearing
note requiring five annual payments of P500,000. The first payment
was made on December 31, 2017. The market interest for similar
notes was 8%. The PV of 1 at 8% for 5 periods is 0.68, the PV of an
ordinary annuity of 1 at 8% for 5 periods is 3.99.

What interest income should be reported for 2017?

Solution:

Interest income for 2017

(1,995,000 X 8%) 159,600
Davao Company is a dealer in equipment on December 31, 2016,
the entity sold an equipment in exchange for noninterest bearing
note requiring five annual payments of P500,000. The first payment
was made on December 31, 2017. The market interest for similar
notes was 8%. The PV of 1 at 8% for 5 periods is 0.68, the PV of an
ordinary annuity of 1 at 8% for 5 periods is 3.99.

What is the carrying amount of the note receivable on December

31, 2017?
Solution:

Note receivable – 12/31/17 (2,500,000 – 500,000) 2,000,000

Unearned interest income – 12/31/17
(2,500,000 – 1,995,000 = 505,000 – 159,600) (345,400)
Carrying amount – 12/31/17 1,654,600
Date Annual Collection Interest income Principal Present value

Dec.31, 2016 1,995,000

Dec.31, 2017 500,000 159,600 340,400 1,654,600
Dec.31, 2018 500,000 132,368 367,632 1,286,968
Dec.31, 2019 500,000 102,957 397,042 871,926
Dec.31, 2020 500,000 69,754 430,246 441,680
Dec.31, 2021 500,000 58,320 441,680 -
Bryan Company purchased from Marge Company a P20,000
8% five-year note that required five equal annual year-end
payments of P5,009. The note was discounted to yield a 9%
rate to Bryan Company. At the date of purchase, Bryan
Company recorded the note at the present value of P19,485.
What is the total interest revenue earned by Bryan Company
over the life of this note?
Solution:

Total payments (5,009 X 5) 25,045

Present value of the note (19,485)
Total interest revenue 5,560
Nobody Company sold a piece of machinery with a list price of
P1,600,000 to Everybody Company on January 1, 2017.
Everybody Company issued a noninterest bearing note of
P1,700,000 due in one year. Nobody Company normally sells
this type of machinery for 90% of list price. What amount
should be recorded as interest revenue?
Solution:

Note receivable 1,700,000

Present value equal to cash price
(1,600,000 X 90%) 1,440,000
Interest revenue 260,000
In preparing the bank reconciliation on December 31, 2016, Cutie Koh Company
provided for the following data:

Balance per bank statement 3,800,000

Deposit in transit 520,000
Amount erroneously credited by bank to Cutie Koh’s account 40,000
Bank service charge for December 5,000
Outstanding checks 675,000

What is the adjusted cash in bank on December 31, 2016? _____________

Solution:
Per bank statement 3,800,000
Deposit in transit 520,000
Outstanding checks (675,000)
Bank error (40,000)
Adjusted bank balance 3,605,000
Diosa Company provided the following information on December 31, 2016:
Petty cash fund 50,000
Current account – 1st bank 4,000,000
Current account – 2nd bank (250,000)
Money market placement – 3rd bank 1,000,000
Time deposit – 4th bank 2,000,000

- The petty cash fund included unreplenished December 2016 petty cash expense vouchers for P15,000
and an employee check for P5,000 dated January 31, 2017
- A check for P100,000 was drawn against 1st bank current account dated and recorded December 29,
2016 but delivered to payee on January 15, 2017.
- The 4th bank time deposit is set aside for land acquisition in early January 2017.

What total amount should be reported as cash and cash equivalents on December 31, 2016?
Solution:

Petty cash fund (50,000 – 15,000 – 5,000) 30,000

Current account – 1st bank (4,000,000 + 100,000) 4,100,000
Money market placement 1,000,000
Total cash and cash equivalents 5,130,000
Jeanette Company provided the following information with respect to cash and cash equivalents on December 31, 2016
Checking account at First bank (200,000)
Checking account at Second bank 3,500,000
Treasury bonds 1,000,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account – restricted (in equivalent pesos) 2,000,000
Postage stamps 50,000
Employee’s postdated check 300,000
IOU from president’s brother 750,000
Credit memo from a vendor for a purchase return 80,000
Traveler’s check 300,000
Not sufficient fund check 150,000
Petty cash fund (20,000 in currency and expense receipts P30,000) 50,000
Money order 180,000

What amount should be reported as unrestricted cash on December 31, 2016?

Solution:

Checking account at second bank 3,500,000

Payroll account 500,000
Value added tax account 400,000
Travelers check 300,000
Petty cash fund 20,000
Money order 180,000
Total unrestricted cash 4,900,000
Bart Company showed the following at year-end:
 
Allowance for doubtful accounts (debit balance) (15,000)
Net sales 7,000,000
 
Bart estimates its uncollectible receivables at 3% of net sales. What is
the allowance for doubtful accounts at year end? ___________
Solution:
The allowance for doubtful accounts at year-end is computed as
follows:

Allowance for doubtful accounts

before adjustment (debit balance) (15,000)
Doubtful accounts expense ( 7,000,000 X 3%) 210,000
Allowance for doubtful accounts, December 31 195,000
Effective with the year ended December 31, 2017, Mall Company adopted a new
accounting method for estimating the allowance for doubtful accounts at the
amount indicated by the year-end aging of accounts receivable. The following
data are available:
 
Allowance for doubtful accounts, January 1 250,000
Provision for doubtful accounts during 2017
(2% of credit sales of P10,000,000) 200,000
Accounts written off 205,000
Estimated uncollectible accounts per aging on December 31 220,000
 
After year-end adjustment, what is the doubtful accounts expense for 2017?
________________
 
Solution:

Allowance for doubtful accounts – January 1 250,000

Doubtful accounts expense (SQUEEZE) 175,000
Total 425,000
Accounts written off (205,000)
Allowance for doubtful accounts – December 31 220,000
Pakito Company follows the procedure of debiting bad debt expense for 2% of all
new sales

Sales Allowance for bad debts

2016 3,000,000 40,000
2017 2,800,000 60,000
2018 3,500,000 80,000

What is the amount of accounts written off in 2018? ____________

Solution:

Allowance for bad debts – December 31, 2017 60,000

Bad debt expense for 2018 (2% X 3,500,000) 70,000
Total 130,000
Allowance for bad debts – December 31, 2018 80,000
Accounts written off in 2018 50,000
The following accounts were abstracted from Spain Company’s
unadjusted trial balance on December 31, 2017:

Debit Credit
Accounts receivable 5,000,000
Allowance for doubtful accounts 40,000
Net credit sales 20,000,000

Spain estimates that 2% of the gross accounts receivable will become

uncollectible. What amount should be recognized as doubtful accounts
expense for 2017?
The doubtful accounts expense is determined as follows:

Allowance for doubtful, December 31, 2017 100,000

Add: Debit balance in allowance account before adjustment 40,000
Doubtful accounts expense 140,000
Vewee Nice Company had the following account balances on December 31, 2016:

Cash in bank – current account 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building
Construction expected to be disbursed in 2017 3,000,000
Time deposit, purchases December 15, 2016 and
Due March 15, 2017 2,000,000

The cash on hand included a P200,000 check payable to Vewee Nice dated January
15, 2017. What total amount should be reported as “cash and cash equivalents” on
December 31, 2016?
Solution:

Cash in bank – current account 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand (500,000 -200,000) 300,000
Time deposit 2,000,000
Total cash and cash equivalents 8,300,000