FAR Handout—Problem 05

Notes Receivable

Problem 01
Crayola BuyRush sold to another entity a tract of land costing P5,000,000 for P7,000,000 on January 1, 2019. The buyer paid
P1,000,000 down and signed a two-year promissory note for the remainder of the purchase price plus 12% interest compounded annually.
The note matures on January 21, 2021.
On January 1, 2019, Crayola, who manufactures and sells computers, also sold computers costing P400,000 for P600,000. The
buyer signed a non-interest bearing note for P600,000 payable in three equal instalments every December 31. The cash selling price of
the computer is P540,000.
On January 1, 2019, Crayola also sold computers costing P700,000 for P1,000,000. The buyer paid P100,000 down and signed
a P900,000 noninterest bearing note payable in three equal instalments every December 31. The prevailing interest rate for the note is
P12%. The present value of an ordinary annuity of 1 for three periods is 2.4018.

Prepare the Journal entries.

Problem 02
James’ Ribs had the following account balances on January 1, 2019:
Note receivable from sale of an idle building P7,500,000
Note receivable from an officer P2,000,000

The P7,500,000 note receivable is dated May 1m 2018, bears interest at 9%and represents the balance of the consideration
received from the sale of an idle building to Sardines LushThreads. Principal payments of P2,500,000 plus interest are due annually
beginning May 1, 2019. Sardines LushThreads made the first principal and interest payment on May 1, 2019.
The P2,000,000 note receivable is dated December 31, 2016, bears interest at 8% and is due on December 31, 2021. The note
is due from the president of James Ribs. Interest is payable annually on December 31, and all interest payments were made through
December 31, 2019
On July 1, 2019, James Ribs sold a parcel of land to Pizza FreshPan for P4,000,000 under an instalment sale contract. Pizza
FreshPan made a P1,200,000 cash down payment on July 1, 2019 and signed a four-year, 10% note for the P2,800,000 balance.
The equal annual payments of principal and interest on the note totaled P880,000, payable on July 1 of each year from 2020
through 2023. The fair value of the land at the date of sale was P4,000,000. The cost of the land was P3,000,000.

Determine the amount of notes receivable that should be reported as current and non-current on December 31, 2019.

Problem 03
On December 31, 2019, Pee Doots Company received two P1,000,000 notes receivable 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 form Buang Gow, made under customary trade terms, is due in nine months and the note from Boong Ga is due in five years.
The market interest rate for similar notes on December 31, 2019 was 8%. The present value of 1 due in nine months is .944
and the present value of 1 due in five years is .68.

At what amount should the note receivable from Buang Gow be reported on December 31, 2019?
At what amount should the note receivable form Boong Ga be reported on December 31, 2019?

Problem 04
On December 31, 2019, Panicky Company sold an equipment with carrying amount of P2,000,000 and received a noninterest-
bearing note requiring payment of P500,000 annually for ten years. The first payment is due December 31, 2020.
The prevailing rate of interest for this type of note at date of issuance is 12%. PV of 1 at 12% for 10 periods is 0.322 and PV
of OA of 1 at 12% for 10 periods is 5.650.

On December 31, 2019, what is the carrying amount of the note receivable?
What is the gain on sale of equipment to be recognized in 2019?
What amount of interest income should be recognized for 2020?
What is the carrying amount of the note receivable on December 31, 2020?

Problem 05
Mizuya Bank granted a loan to a borrower on January 1, 2019. The interest on the loan is 10% payable annually starting
December 31, 2019. The loan matures in three years on December 31, 2021.

Principal amount P4,000,000

Direct origination cost incurred P150,000
Origination fee received from the borrower P342,100

After considering the origination fee received from the borrower and the direct origination cost incurred, the effective rate on
the loan is 12%.

Prepare the journal entries. Present the loan receivable on December 31, 2019.

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 FAR Handout—Problem 05

Problem 06
On January 1, 2019 Blank Bank loaned P3,000,000 to a borrower. The contract specified that the loan had a 6-year term and a
9% interest rate.

Interest is payable annually every December 31 and the principal amount will be collected on December 31, 2024. Interest is
collected for 2019.

On December 31, 2019, the bank determined that the loan has a 12-month probability of default of 2% and expected to collect
only 90% of the loan.

On December 31, 2020, the bank determined that there is a significant increase in the credit risk of the loan but no objective
evidence of impairment.

Based on relevant information, the bank concluded that there is a 30% probability of default over the remaining term of the
loan and it is expected that only 60% of the loan will be collected. Interest is collected for 2020.

On December 31, 2021, the borrower was under financial difficulty and the loan was considered impaired.

The bank agreed that only 40% of the principal will be collected on due date. Interest is collected for 2021.

The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods and 0.77 for three periods.

Prepare the journal entries.

Problem 07
China Bank loaned P9,000,000 to a borrower on January 1, 2017. The terms of the loan were payment in full on January 1,
2022 plus annual interest payment at 12%.

The interest payment was made as scheduled on January 1, 2018. However, due to financial setbacks, the borrower was
unable to make the 2019 interest payment.

The bank considered the loan impaired and projected the cash flows from the loan on December 31, 2019.

The bank has accrued the interest on December 3, 2018, but did not continue to accrue interest for 2019 due to the
impairment of the loan. The projected cash flows are:
Date of cash flow Amount projected on 12/31/19
12/31/20 P1,500,000
12/31/21 P2,000,000
12/31/22 P2,500,000
12/31/23 P3,000,000

The present value of 1 at 12% is .89 for one period, .80 for two periods, .71 for three periods, and .64 for four periods.

What is the loan impairment loss for 2019?

What is the interest income for 2020?
What is the carrying amount of the loan receivable on December 31, 2020?

Problem 08
On December 31, 2019, Tsina Bank granted P5,000,000 loan to a borrower with 10% stated rate payable annually and
maturing in 5 years. The loan was discounted at the market interest rate of 12%.

Unfortunately, the financial condition of the borrower worsened because of the lower revenue.

On December 31, 2021, the bank determined that the borrower would pay back only P3,000,000 of the principal at maturity.

However, it was considered likely that interest would continue to be paid on the P5,000,000 loan.

The present value of 1 at 12% is .57 for five periods and.71 for three periods.

The present value of an ordinary annuity of 1 at 12% is 3.60 for five periods and 2.40 for three periods.

What is the amount of cash paid to the borrower on December 31, 2019?
What is the amount of the loan receivable on December 31, 2021?
What is the impairment loss on loan receivable to be recognized for 2021?