NOTES AND LOANS RECEIVABLE

Roth Company received from a customer a one-year, P500,000 note bearing

annual interest of 8%. After holding the note for six months, Roth discounted
the note at Regional Bank at an effective interest rate of 10%
1. What amount of cash did Roth receive from the bank?
a. 540,000
b. 523,810
c. 513,000
d. 495,238

On July 1, 2006, Lee Company sold goods in exchange for P2,000,000, 8

month, noninterest-bearing note receivable. At the time of the sale, the notes
market rate of interest was 12%.
2. What amount did Lee receive when it discounted the note at 10% on
September 1, 2006?
a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

Apex Company accepted from a customer P1,000,000 face amount, 6-month,

8% note date April 15, 2006. On the same date Apex discounted the note at
Union Bank at a 10% discount rate.
3. How much cash should Apex receive from the bank on April 15, 2006?
a. 1,040,000
b. 990,000
c. 988,000
d. 972,000

On June 30, 2006, Ray Company discounted at the bank a customers

P6,000,000, 6-month, 10% note receivable dated April 30, 2006. The bank
discounted the note at 12%.
4. Rays proceeds from this discounted note amounted to
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

On July 1, 2005, Kay Corporation sold equipment to Mando Company for

P1,000,000. Kay accepted a 10% note receivable for the entire sales price. This
note is payable in two equal installments of P500,000 plus accrued interest on
December 31, 2005 and December 31, 2006. On July 1, 2006, Kay discounted
the note at a bank at an interest rate of 12%
5. Kays proceeds from the discounted note were
a. 484,000
b. 493,500
c. 503,500
d. 517,000

Rand Company accepted from a customer a P4,000,000, 90-day 12% interest

bearing note dated August 31, 2006. On September 30, 2006, Rand discounted
the note at the Apex State Bank at 15%. However, the proceeds were not
received until October 1, 2006.
6. In the September 30,2006 balance sheet, the amount of receivable from the
bank based on a 360-day year, includes accrued interest revenue of
a. 17,000
b. 20,000
c. 30,000
d. 40,000
On November 1, 2006, Davis Company discounted with recourse at 10% a one-
year, noninterest bearing, P2,050,000 note receivable maturing on January 31,
2007.
7. What amount of contingent liability for this not must Davis disclose in its
financial statements for the year ended December 31, 2006?
a. 2,050,000
b. 2,000,000
c. 2,033,333
d. 0

On August 1, 2006, Vann Corporations P5,000,000 one-year, non-interest-

bearing note due July 31, 2007, was discounted at Homestead Bank at 10.8%.
Vann uses the straight-line method of amortizing discount.
8. What amount should Vann report for note payable in its December 31, 2006
balance sheet?
a. 5,000,000
b. 4,775,000
c. 4,685,000
d. 4,460,000

Brooke Corporation discounted its own P5,000,000 one-year note at a bank, at

a discount rate of 12%, when the prime rate was 10%. In reporting the note on
Brookes balance sheet prior to the notes maturity,
9. what rate should Brooke use for the accrual of interest?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%

Frame Company has an 8% note receivable dated June 30, 2004, in the original
amount of P1,500,000. Payments of P500,000 in principal plus accrued
interest are due annually on July 1, 2005, 2006 and 2007. In its June 30,
2006 balance sheet,
10. what amount should Frame report as a current asset for interest on the
note receivable?
a. 120,000
b. 40,000
c. 80,000
d. 0

On June 1, 2006, Yola Corporation loaned Dale P500,000 on a 12% note,

payable in five annual installments of P100,000 beginning January 2, 2007. In
connection with this loan, Dale was required to deposit P5,000 in a non-interest
bearing escrow account. The amount held in escrow is to be returned to Dale
after all principal and interest payments have been made. Interest on the note
is payable on the first day of each month beginning July 1, 2006. Dale made
timely payments through November 1, 2006. On January 2, 2007, Yola
received payment of the first principal installment plus all interest due.
11. At December 31, 2006, Yolas interest receivable on the loan to Dale should
be
a. 0
b. 5,000
c. 10,000
d. 15,000

On December 31, 2006, Jet Company received two P1,000,000 notes

receivables from customers in exchange for services rendered. On both notes,
interest is calculated on the outstanding principal balance at the annual rate of
3% and payable at maturity. The note from Hart Corporation, made under
customary trade terms, is due in nine months and the note from Maxx
Company is due in five years. The market interest rate for similar notes on
December 31, 2006 was 8%. The compound interest factors to convert future
value into present value at 8% follow:
Present value of 1 due in nine months .944
Present value of 1 due in five years .680
12. At what amounts should these two notes receivable be reported in Jets
December 31, 2006 balance sheet?
Hart Maxx
a. 944,000 680,000
b. 965,200 782,000
c. 1,000,000 680,000
d. 1,000,000 782,000

On January 1, 2006 Ott Company sold goods to Fox Company. Fox signed a
noninterest-bearing note requiring payment of P600,000 annually for seven
years. The first payment was made on January 1, 2006. The prevailing rate of
interest for this type of note at date of issuance was 10%. Information on
present value factors is as follows:
Period Present value of 1 at Present value of ordinary
10% annuity of 1 at 10%
6 .56 4.36
7 .51 4.87
13. Ott should record sales revenue in January 2006 of
a. 3,216,000
b. 2,922,000
c. 2,616,000
d. 2,142,000

Rex Company accepted a P1,000,000, 2% interest bearing note from Brooks

Company on December 31, 2006, in exchange for a machine with a list price of
P800,000 and a cash price of P750,000. The note is payable on December 31,
2008.
14. In its 2006 income statement, Rex should report the sale at
a. 750,000
b. 800,000
c. 1,000,000
d. 1,040,000

On December 31, 2006, Park Company sold used equipment and received a
noninterest-bearing note requiring payment of P500,000 annually for ten years.
The first payment is due December 31, 2007 and the prevailing rate of interest
for this type of note at date of issuance is 12%. Present value factors are as
follows:
Present value of 1 at 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.650
15. In its December 31, 2006 balance sheet, Park should report the carrying
amount of the note at
a. 1,610,000
b. 2,175,000
c. 2,825,000
d. 5,000,000

On December 30, 2006, Chang Company sold a machine to Door Company in exchange
for a noninterest bearing note requiring ten annual payments of P100,000. Door made the
first payment on December 30, 2006. The market interest rate for similar notes at date of
issuance was 8%. Information on present value factors is:
Present value Present value of ordinary
Period of 1 at 8% annuity of 1 at 8%
9 0.50 6.25
10 0.46 6.71
16. In its December 31, 2006 balance sheet, what amount should Chang report
as note receivable?
a. 450,000
b. 460,000
c. 625,000
d. 671,000

On January 2, 2006, Emme Company sold equipment with a carrying amount

of P4,800,000 in exchange for a P6,000,000 noninterest bearing note due
January 2, 2009. There was no established exchange price for the equipment.
The prevailing rate of interest for a note of this type on January 2, 2006, was
10%. The present value of 1 at 10% for three periods is 0.75
17. In Emmes 2006 income statement, what amount should be reported as
interest income?
a. 90,000
b. 450,000
c. 500,000
d. 600,000

18. In Emmes 2006 income statement, what amount should be reported as

gain or loss on sale of equipment?
a. 300,000 loss
b. 300,000 gain
c. 1,200,000 gain
d. 2,700,000 gain

On January 1, 2006, Mill Company sold a building and received as

consideration P1,000,000 cash and a P4,000,000 noninterest bearing note due
on January 1, 2009. There was no established exchange price for the building,
and the note had no ready market. The prevailing rate of interest for a note of
this type at January 1, 2006, was 10%. The present value of 1 at 10% for three
periods is 0.75.
19. What amount of interest revenue should be included in Mills 2006 income
statement?
a. 370,000
b. 400,000
c. 300,000
d. 330,000

Pasadeas Company sold some machinery to the Rodac Company on January

1, 2005, for which the cash selling price was P7,582,000. Rodac entered into
an installment sales contract with Pasadea at an interest rate of 10%. The
contract required payments of P2,000,000 a year over five years with the first
payment due on December 31, 2005.
20. What amount of interest income, if any, should be included in Pasadeas
2006 income statement using the interest method?
a. 1,000,000
b. 634,020
c. 758,200
d. 0

Appari Bank granted a loan to a borrower on January 1, 2006. The interest rate
on the loan is 10% payable annually starting December 31, 2006. The loan
matures in five years on December 31, 2010.
Principal amount 4,000,000
Direct origination cost 61,500
Origination fee received from borrower 350,000
The effective rate on the loan after considering the direct origination cost and
origination fee received is 12%.
21. What is the carrying value of the loan receivable on January 1, 2006?
a. 4,000,000
b. 4,650,000
c. 4,411,500
d. 3,711,500

22. What is the interest income for 2006?

a. 400,000
b. 558,000
c. 529,380
d. 445,380

National Bank grants a 10-year loan to Abbo 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. National Bank incurs P40,000 of direct loan
origination cost and P20,000 of indirect loan origination cost. In addition,
National Bank charges Abbo a 4-point nonrefundable loan origination fee.
23. National Bank, the lender, has a carrying amount of
a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000

24. Abbo, the borrower, has a carrying amount of

a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000

Kalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2004. 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, 2005. Caticlan Company made the required payments during 2005
and 2006. However, during 2006 Caticlan Company began to experience
financial difficulties, requiring Kalibo to reassess the collectibility of the loan.
On December 31, 2006, Kalibo Bank determines that the remaining principal
payment will be collected but the collection of the interest is unlikely. The
present value of 1 at 8% is as follows:
For one period 0.93
For two periods 0.86
For three periods 0.79
25. What is the loan impairment loss on December 31, 2006?
a. 420,000
b. 210,000
c. 630,000
d. 0

26. What is the interest income to be reported by Kalibo Bank in 2007?

a. 223,200
b. 143,200
c. 240,000
d. 0

Buswang Beach Bank loaned Boracay Company P7,500,000 on January 1,

2004. The terms of the loan were payment in full on January 1, 2009 plus
interest payment at 11%. The interest payment was made as scheduled on
January 1, 2005. However, due to financial setbacks, Boracay was unable to
make its 2006 interest payment. Buswang Beach considers the loan impaired
and projects the cash flows from the loan as of December 31, 2006. Assume
that the bank accrued the interest at December 31, 2005, but did not continue
to accrue interest due to the impairment of the loan. The projected cash flows
are:
Amount projected as of
Date of cash flow Dec. 31 2006
December 31, 2007 500,000
December 31, 2008 1,000,000
December 31, 2009 2,000,000
December 31, 2010 4,000,000
The present value of 1 at 11% is as follows:
For one period 0.90
For two period 0.81
For three period 0.73
For four period 0.66

27. How much is the loan impairment loss on December 31, 2006?
a. 2,965,000
b. 2,240,000
c. 5,360,000
d. 2,140,000

28. What is the interest income to be reported by Buswang Beach Bank in

2007?
a. 589,600
b. 534,600
c. 825,000
d. 599,456

END