JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS, INC.

2013
UNIVERSITY OF THE PHILIPPINES VISAYAS

REVIEWER IN ACCOUNTING THEORY & PRACTICE I

NOTES RECEIVABLE
Problem 1

On December 31, 2011, Bluechips provides a service for its customer Scions in exchange for a
promissory note requiring five annual payments of $1,000 each. The payments are to occur on
December 31 of each year beginning on December 31, 2012. The note does not specify any interest,
& there is no market for the note. The value of the service performed by Bluechips is unique & no
market value is available. Based on the credit worthiness of Scions & the length of the note, it is
estimated that Scions would have to pay 10% interest if it borrowed a similar amount from a bank.
Instructions:
(a) Prepare a loan amortization schedule for five years (use three decimal places for PV factor)
(b) Prepare the journal entry on December 31, 2011
(c) Prepare the journal entry on December 31, 2012
Solution:

Amortization Schedule
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.

Date
31, 2011
31, 2012
31, 2013
31, 2014
31, 2015
31, 2016

Payment

Interest

Principal

1,000.00
1,000.00
1,000.00
1,000.00
1,000.00

379.10
317.01
248.71
173.58
90.60 (R)

620.90
682.99
751.29
826.42
909.40

Balance
3,791.00
3,170.10
2,487.11
1,735.82
909.40
0.00

* Interest payment equals 10% of the previous principal balance.

** Principal payment equals $1,000 minus interest payment.
(R) Rounded

PV = 1,000 x 3.791 (PV of an ordinary annuity, 10%, 5 periods)

Dec 31, 2011:

Dec 31, 2012:

Notes Receivable
Discount on Notes Receivable
Service Revenues

5,000

Cash

1,000

1,209
3,791

Notes Receivable
Discount on Notes Receivable
Interest Revenue

1,000
379.10
379.10

Or
Dec 31, 2011:

Dec 31, 2012:

Notes Receivable
Service Revenues

3,791

Cash

1,000

3,791

Interest Revenue
Notes Receivable

379.10
620.90

Problem 2

Mauville Electric Company received a $150,000, 3-year noninterest bearing note on January 1, 2010
when the market rate of interest was 8%. The note is to be repaid in 3 installments of $60,000 on
December 31, 2010, $50,000 on December 31, 2011, and $40,000 on December 31, 2012.
Instructions:
(a) Compute for the present value of the note on January 1, 2010
(b) Prepare a 3-year amortization schedule for the note
(c) Prepare the journal entry upon receipt of the note (Jan 1, 2010)
(d) Prepare the journal entry upon receipt of the 1st installment payment (Dec 31, 2010)

Solution:

Present Value
1st installment, 60,000 x 0.92593 (PV single sum, 8%, 1 year)
2nd installment, 50,000 x 0.85734 (PV single sum, 8%, 2 years )
3rd installment, 40,000 x 0.79383 (PV single sum, 8%, 3 years )

$ 55,556
42,867
31,753
$ 130,176

Amortization Table
Date
Jan. 01, 2010
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012

Payment
60,000
50,000
40,000

Interest
10,414
6,447
2,963

Principal
49,586
43,553
37,037

Balance
130,176
80,590
37,037
-

January 1, 2010:
Notes Receivable
Discount on Notes Rec
Cash

150,000
19,824
130,176

December 31, 2010:

Cash

60,000
Notes Receivable

60,000

Discount on Notes Rec

Interest Income

10,414
10,414
Or

January 1, 2010:
Notes Receivable
Cash
December 31, 2010:

130,176
130,176

Cash

60,000
Notes Receivable
Interest Income

49,586
10,414

Problem 3

A $150,000, 3-year noninterest bearing note was received by Slateport Company on January 1, 2010
when the market rate of interest was 8%. The note is to be repaid in a single installment of
$150,000 on December 31, 2012.
Instructions:
(a) Compute for the present value of the note (use five decimal places for PV factor)
(b) Prepare an amortization schedule for 3 years
(c) Prepare the journal entries on December 31, 2012
Solution:

PV = 150,000 x 0.79383 (PV single sum, 8%, 3 yrs) = P 119,075

Amortization Table
Date
Jan. 01, 2010
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012

Payment
-

Interest
9,526
10,288
11,111

Principal
9,526
10,288
11,111

Balance
119,075
128,601
138,889
150,000

December 31, 2012

Discount on Notes Receivable
Interest Income

11,111
11,111

Cash

150,000
Notes Receivable

150,000
Or

Notes Receivable
Interest Income
Cash

11,111
11,111
150,000

Notes Receivable

150,000

Problem 4

Odale Corp. lends Flannery Imports $10,000 in exchange for a $10,000, three-year note bearing
interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10
percent.
Compute for the present value of the note (use five decimal places for the PV factor).
Solution:

Present value of the principal:

$10,000 x 0.75132 (PV single sum, 10%, 3 yrs)

$ 7,513

Present value of the interest:

$1,000 x 2.48685 (PV annuity, 10%, 3 yrs)

2,487

PV of Note

$ 10,000

Problem 5

Hoenn Region, Inc sold a piece of equipment that originally cost $ 1,000,000 and had accumulated
depreciation of $ 400,000. The contract terms were as follows:
Cash down payment, $ 70,000
$ 700,000, 10-year, 5% note receivable with interest paid at the end of each year.
The market rate of interest on a comparable note would be 8% per annum.
Instructions:
(a) Compute for the selling price of the equipment (use five decimal places for PV factor)
(b) Compute for the gain/loss on sale
(c) Prepare the entry to record the sale
(d) Prepare the entry to record collection of the first interest payment
Solution:

Selling Price
PV of Principal:
700,000 x 0.46319 (PV single sum, 10 yrs, 8%)

$ 324,233

PV of Interest
700,000 x 5% = 35,000
35,000 x 6.71008 (PV annuity, 10 yrs, 8%)

234,853

PV of Notes Receivable

559,086

Cash Downpayment

70,000

Total Selling Price

$ 629,086

Gain / Loss
Total Selling Price
Less: Book Value (1,000,000 400,000)
Gain on Sale

$ 629,086
600,000
$ 29,086

Entry: Sale
Cash
Notes Receivable
Accumulated Depreciation
Equipment
Discount on Notes Rec
Gain on Sale

70,000
700,000
400,000
1,000,000
140,914
29,086

Entry: Collection of first interest

Cash
Discount on Notes Rec
Interest Revenue

35,000
9,727

* 559,086 (PV of Notes Receivable) x 8% (effective rate)

44,727 *

Problem 6

On August 31, 2010, the Indigo Corporation discounts a customers note at its bank at a 14% discount
rate. The note was received from the customer on August 1, is for 90 days, has a face value of
$5,000, and carries an interest rate of 12%.
Compute for the loss from discounting of note.
Solution:

Face value of note

Interest to maturity ($5,000 x 0.12 x 90/360)
Maturity value of note
Less: Discount ($5,150 x 0.14 x 60/360)
Proceeds received
Book value of note ($5,000 + $50*)
Loss on discounting of note

$ 5,000.00
150.00
5,150.00
(120.17)
5,029.83
(5,050.00)
$
20.17

* Accrued interest revenue: ($5,000 x 0.12 x 30/360) = 50.00

Problem 7

Littleroot Company discounted its 120-day, 7%, P 6,000 notes receivable to ABC bank for an 18%
discount. The company held the note for 40 days.
Instructions:
(a) Compute for the amount of proceeds
(b) Journalize the transaction
Solution:

Maturity value of the Note

Principal
Interest (6,000 x 7% x 120/360)
Less: Discount
P 6,140 x 18% x (80/360)
Proceeds

P 6,000
140
6,140
246
P 5,894

Journal Entry
Cash
Interest Expense
Notes Receivable
Interest Revenue

5,894
153 *

* Loss on Discounting = (6,000 + 47) 5,894

** Interest Earned = 6,000 x 7% x (40/360)

6,000
47 **