INTERMEDIATE ACCOUNTING, PART 1

RECEIVABLES: ACCOUNTNG FOR NOTES AND LOAN RECEIVABLES

1. If a note is exchange for property and no interest rate is stated, the note is recorded at
a. Fair market value of the property or note c. Face value of the note
b. Maturity value of the note d. Carrying value of the property
2. How should unearned interest included in the face amount of notes receivable be presented on the statement of
financial position?
a. As a deferred credit c. In the footnotes
b. As a deduction from the related receivable d. As a current liability
3. According to the PFRSs, receivables are initially recognized at
a. Fair value c. Present value
b. Cost d. Fair value plus direct transaction costs
4. AAA Co. makes all of its sales on 30-day credit terms. During the period, AAA made a special sale to one of its
customers, wherein the customer was extended a 9-month credit term. AAA received a P10M noninterest-bearing
note on the sale. According to the PFRSs, AAA should initially recognize the receivable at
a. Face amount b. Present value c. Appraised value d. Fair value less costs to sell
5. AAA Co. received a 3-year, 3%, note receivable from one of its customers. The current rate at the date of receipt
of the note was 12%. AAA should initially recognize the receivable at
a. Face amount b. Present value c. Appraised value d. Fair value less costs to sell
6. Which of the following rates may be used to compute for the interest income on a receivable?
a. Stated rate b. Nominal rate c. Coupon rate d. Effective interest rate
7. Which of the following rates may be used to compute for the interest receivable on a note receivable?
a. Yield rate b. Current rate c. Nominal rate d. Imputed rate of interest
8. A noninterest-bearing note
a. Bears no effective interest rate c. Has an unspecified principal and an unspecified interest
b. Does not result to any interest income d. Has a specified principal but an unspecified interest rate
9. The imputed rate of interest is
a. The prevailing rate for a similar instrument of an issuer with a similar credit rating
b. A rate of interest that discounts the face (nominal) amount of the receivable to the current cash sales price of
the goods or services
c. The more clearly determinable of either (a) or (b)
d. None of these
10. The concept of time value of money
a. Is irrelevant in financial reporting
b. States that money loses its value over time because of inflation
c. Provides that contractual agreements to receive cash or to pay cash in the future will earn or incur interests
due to passage of time regardless of whether interests have been agreed upon or not
d. Is a pervasive concept which affects only financial reporting but not managerial accounting
11. When a note receivable earns compounded interest,
a. The principal is due at maturity but interests are due periodically
b. It means that the note is a long-term asset
c. Both the principal and interest are due only at maturity date
d. Interest income on the note is computed using a very complex formula
12. When the contractual cash flows on a debt instrument that is measured at amortized cost are due in installments
and the first installment is due a period from the date of the instrument, the present value (PV) factor used to
discount the future cash flows is
a. PV of P1 c. PV of an annuity due of P1
b. PV of ordinary annuity of P1 d. PV of a deferred annuity
13. Total interest income recognized over the life of a noninterest-bearing note is
a. Zero
b. Greater than the total interest received on the note
c. Less than the total interest received on the note
d. Equal to the unearned interest income on initial recognition
14. The present value of a debt instrument is computed by
a. Multiplying the future cash flows from the note by the effective interest rate
b. Adding the future cash flows
c. Adding the future cash flows from the principal to the sum of the periodic interests receivable
d. Dividing the future cash flows from the note by the effective interest rate
15. The periodic cash flows from a debt instrument may be computed by
a. Multiplying the future cash flows from the note by the effective interest rate
b. Dividing the initial carrying amount by the effective interest rate
c. Adding together the periodic interest income and the amortization
d. Dividing the face amount by the life of the instrument

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 INTERMEDIATE ACCOUNTING, PART 1

Accounting for Notes Receivable

1. An entity sells goods either on cash basis or on 6-month installment basis. On January 1, 2016, goods with cash
price of P50,000 were sold at an installment price of P75,000. Which of the following statements is correct?
a. Net receivable of P75,000 is recognized on the date of sale.
b. Net receivable of P50,000 is recognized upon full payment of the total price.
c. The P20,000 difference between the cash price and installment price is recognized as interest income on the
date of sale.
d. Net receivable of P50,000 is recognized on the date of sale.
2. An entity sells goods for P150,000 to a customer who was granted a special credit period of 1 year. The entity
normally sells the goods for P120,000 with a credit period of one month or with a P10,000 discount for outright
payment in cash. How much is the initial measurement of the receivable?
a. 150,000 b. 120,000 c. 130,000 d. 110,000
3. AAA Company accepted a P5,000,000, 2% interest bearing note from BBB Company on December 31, 2016, in
exchange for a machine with a list price of P4,000,000 and a cash price of P3,750,000. The note is payable on
December 31, 2018. In its 2016 statement of comprehensive income, AAA should report the sale at
a. P3,750,000 b. P4,000,000 c. P5,000,000 d. P5,200,000
Use the following to answer the next two questions
On January 1, 2016, ABC Co. sold a transportation equipment with a historical cost of P1,000,000 and accumulated
depreciation of P300,000 in exchange for cash of P100,000 and a noninterest-bearing note receivable of P800,000 due
on January 1, 2019. The prevailing rate of interest for this type of note is 12%.
4. How much is the interest income in 2016?
a. 68,331 b. 76,532 c. 85,714 d. 96,000
5. How much is the carrying amount of the receivable on December 31, 2017?
a. 800,000 b. 569,424 c. 637,755 d. 714,286
Use the following to answer the next three questions
On January 1, 2016, ABC Co. sold transportation equipment with a historical cost of P20,000,000 and accumulated
depreciation of P7,000,000 in exchange for cash of P500,000 and a noninterest-bearing note receivable of P8,000,000
due in 4 equal annual installments starting on December 31, 2016 and every December 31 thereafter. The prevailing
rate of interest for this type of note is 12%.
6. How much is the interest income in 2016?
a. 728,946 b. 678,334 c. 728,964 d. 704,236
7. How much is the current portion of the receivable on December 31, 2016?
a. 1,271,036 b. 1,423,560 c. 3,380,102 d. 1,594,388
8. How much is the carrying amount of the receivable on December 31, 2017?
a. 4,803,663 b. 3,380,102 c. 6,074,699 d. 6,000,000
Use the following to answer the next three questions
On January 1, 2016, ABC Co. sold transportation equipment with a historical cost of P12,000,000 and accumulated
depreciation of P7,000,000 in exchange for cash of P100,000 and a noninterest-bearing note receivable of P4,000,000
due in 4 equal annual installments starting on January 1, 2016 and every January 1 thereafter. The prevailing rate of
interest for this type of note is 12%.
9. How much is the interest income in 2016?
a. 408,230 b. 278,334 c. 328,964 d. 288,220
10. How much is the carrying amount of the receivable on December 31, 2016?
a. 1,690,510 b. 892,857 c. 2,690,051 d. 1,594,388
11. How much is the carrying amount of the receivable on January 1, 2018?
a. 892,857 b. 3,380,102 c. 6,074,699 d. 6,000,000
Use the following to answer the next two questions
On January 1, 2016, ABC Co. sold machinery with historical cost of P3,000,000 and accumulated depreciation of
P900,000 in exchange for a 3-year, P2,100,000 noninterest-bearing note receivable due in equal semi-annual
payments every July 1 and December 31 starting on July 1, 2016. The prevailing rate of interest for this type of note
is 10%.
12. How much is the interest income in 2016?
a. 88,825 b. 177,649 c. 128,964 d. 164,591
13. How much is the carrying amount of the receivable on December 31, 2016?
a. 1,241,083 b. 982,378 c. 1,690,051 d. 1,594,388
14. On January 1, 2016, ABC Co. sold machinery costing P3,000,000 with accumulated depreciation of P1,100,000 in
exchange for a 3-year, P900,000 noninterest-bearing note receivable due as follows:
Date Amount of installment
December 31, 2016 P 400,000
December 31, 2017 300,000
December 31, 2018 200,000
Total P 900,000
The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of the receivable on
December 31, 2016?

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 INTERMEDIATE ACCOUNTING, PART 1

a. 467,354 b. 438,016 c. 376,345 d. 428,346

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 INTERMEDIATE ACCOUNTING, PART 1

Use the following to answer the next two questions

On January 1, 2016, ABC Co. sold inventory costing P1,800,000 with a list price of P2,200,000 and a cash price of
P2,000,000 in exchange for a P2,400,000 noninterest-bearing note due on December 31, 2018.
15. How much is the initial measurement of the receivable?
a. 1,800,000 b. 2,200,000 c. 2,000,000 d. 2,400,000
16. How much is the carrying amount of the receivable on December 31, 2016?
a. 2,125,390 b. 2,135,341 c. 2,098,343 d. 2,000,000
17. On January 1, 2016, ABC Co. sold machinery with historical cost of P5,000,000 and accumulated depreciation of
P1,900,000 in exchange for a 3-year, 3%, P3,000,000 note receivable. Principal is due on January 1, 2019 but
interest is due annually every December 31. The prevailing interest rate for this type of note is 12%. How much is
the carrying amount of the receivable on December 31, 2016?
a. 2,159,324 b. 2,249,324 c. 2,543,685 d. 3,000,000
18. On July 1, 2016, ABC Co. sold machinery costing P12,000,000 with accumulated depreciation of P9,000,000 in
exchange for a 3-year, 3%, P4,000,000 note receivable. Principal is due on July 1, 2019 but interests are due
semiannually every July 1 and January 1. The prevailing interest rate for this type of note is 12%. How much is
the interest income in 2016?
a. 186,893 b. 381,399 c. 94,147 d. 120,000
19. On January 1, 2016, ABC Co. sold machinery costing P2,000,000 with accumulated depreciation of P950,000 in
exchange for a 3-year, 3%, P900,000 note receivable. Principal is due in three equal annual installments.
Interests on the outstanding principal balance are also due annually and are to be collected together with the
periodic collections on the principal. The prevailing interest rate for this type of note is 12%. How much is the
carrying amount of the receivable on December 31, 2016?
a. 530,261 b. 1,000,562 c. 673,531 d. 789,361
20. On January 1, 2016, ABC Co. sold machinery costing P2,000,000 with accumulated depreciation of P950,000 in
exchange for a 3-year, P1,200,000 note receivable. Principal and interest at 3% are due on January 1, 2019. The
prevailing interest rate for this type of note is 12%. How much is the carrying amount of the receivable on initial
recognition date?
a. 1,311,272 b. 2,000,000 c. 933,337 d. 854,136
LOANS RECEIVABLE
1. On January 1, 2016, ABC Bank extended a 12%, P1,000,000 loan to XYZ, Inc. Principal is due on January 1, 2020
but interests are due annually every January 1. ABC Bank incurred direct loan origination costs of P88,394 and
indirect loan origination costs of P18,000. In addition, ABC Bank charged XYZ a 2.5-point nonrefundable loan
origination fee. How much is the interest income in 2017?
a. 104,973 b. 105,364 c. 106,339 d. 136,661
2. On January 2, 2015, AAA Company originates a 10-year 7% P 4,000,000. The loan carries an annual interest rate
of 7% and is repayable at par at the end of year 10 (December 31, 2021).
AAA Company charges a 1.25% (P50,000) non-refundable loan origination fee to the borrower and also incurs
P100,000 in direct origination costs.
The contract specifies that the borrower has an option to pre-pay the instrument at approximately equal to
instrument’s amortized cost at each exercise date, and that no penalty will be charged for pre-payment.
But at the inception of the contract AAA Company expects the borrower not to pre-pay, the amortization period is
equal to the instrument’s full term and for that reason the effective yield rate is determined at 6.823%.
What is the amortized cost of the instrument on December 31, 2016?
a. P4,038,288 b. P4,042,413 c. P4,046,331 d. P4,050,000
Use the following to answer the next two questions
On January 1, 2016, ABC Bank extended a P900,000 loan to XYZ, Inc. Principal is due on December 31, 2020 but
12% interest is due annually starting December 31, 2016.
On December 31, 2018, XYZ, Inc. was delinquent and it was ascertained that the loan is impaired. ABC Bank assessed
that interests accruing on the loan will not be collected; however, the principal is expected to be received in three
equal annual installments starting on December 31, 2019. Accrued interest receivable on December 31, 2018
amounted to P100,000. The current market rate on December 31, 2018 is 14%.
3. How much is the balance of allowance for impairment loss on December 31, 2018 immediately after impairment
testing?
a. 279,460 b. 303,510 c. 203,510 d. 179,460
4. How much is the interest income in 2020?
a. 86,465 b. 60,481 c. 60,841 d. 0

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 INTERMEDIATE ACCOUNTING, PART 1

Use the following to answer the next two questions

On January 1, 2016, ABC Co. received a P1,000,000 note receivable from XYZ, Inc. Principal payments of P200,000
and interest at 12% are due annually at the end of each year for 5 years. The first payment starts on December 31,
2016.

XYZ, Inc. made the required payments during 2016 and 2017. However, during 2018 XYZ, Inc. began to
experience financial difficulties, requiring ABC Co. to reassess the collectibility of the note. Because of the loss
event, ABC Co. did not accrue the interest on December 31, 2018. The current rate of interest on December 31,
2018 is 10%. ABC Co. made the following cash flow projections on December 31, 2018:
Date of expected receipt Amount of cash flow
January 1, 2019 200,000
January 1, 2020 150,000
January 1, 2021 150,000
5. How much is the impairment loss recognized in 2018?
a. 146,492 b. 195,082 c. 139,669 d. 181,518
6. How much is the interest income in 2019?
a. 54,421 b. 30,421 c. 16,071 d. 0
7. On January 1, 2016, ABC Bank extended a 3-year, 12%, P1,000,000 loan to XYZ, Inc. at a price that yields an
effective interest rate of 10%. Principal is due at maturity but interest is due annually every December 31.
On December 31, 2016, XYZ was delinquent and it was ascertained that the loan was impaired. The loan was
restructured as follows:
 Only the principal amount of P1,000,000 shall be collected from the loan. This is due on December 31, 2018.
 ABC Co. waived the collection of interest.
On December 31, 2017, XYZ’s credit rating has improved and the loan was again restructured as follows:
 Aside from the principal amount of P1,000,000, which is due on December 31, 2018, a 14% interest will also
be collected.
 The new terms shall be applied prospectively.
How much is the gain on impairment reversal on December 31, 2017? (Do not round-off present value factors)
a. 109,091 b. 112,561 c. 134,341 d. 141,323
SELF-TEST QUIZZERS
1. Assuming that the ideal measure of short-term receivables in the statement of financial position is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make the statement
of financial position misleading because
a. Most short-term receivables are not interest bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor
2. On April 1, 2016, a company 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 on March 31, 2017. The interest
receivable account at June 30, 2016 would consist of the amount representing
a. The excess on April 1, 2016 of the present value of the notes receivable over its face value.
b. Three months of accrued interest income
c. Nine months of accrued interest income
d. Twelve months of accrued interest income
3. At the beginning of 2016, Evans Company received a three-year zero-interest-bearing P60,000 note receivable for
merchandise sold. The market rate for equivalent notes was 8% at that time. Evans reported this note as charge
to notes receivable and a credit to sales revenue for P60,000. What effect did this accounting for the note have
on Evan’s profit for 2016, 2017, 2018, and its retained earnings at the end of 2018, respectively?
a. Overstate, understate, understate, understate
b. Overstate, understate, understate, no effect
c. Overstate, overstate, overstate, overstate
d. Overstate, overstate, understate, no effect
4. On January 1, 2016, Orlando Company sold goods to Portland Company. Portland signed a noninterest-bearing
note requiring payment of P600,000 annually for seven years. The first payment was made on January 1, 2016.
The prevailing rate of interest for this type of note at date of issuance was 10%.
The amount recorded as sales revenue in January 2016 is
a. P2,142,000 b. P2,616,000 c. P2,922,000 d. P3,216,000
5. On December 27, 2016, Chicago Company sold a building, receiving as consideration a P4,000,000 noninterest
bearing note due in three years. The building had a cost of P3,800,000 and the accumulated depreciation was
P1,600,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value
of P1 for three periods at 12% is 0.712.
The gain on sale reported by Chicago Company in the 2016 comprehensive income statement is
a. P0 b. P200,000 c. P648,000 d. P1,800,000
6. On December 31, 2016, Boston 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, 2017 and the prevailing rate
of interest for this type of note at date of issuance is 12%. The carrying amount of the note in the December 31,
2016 is (round off present value factors to three decimal places)

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 INTERMEDIATE ACCOUNTING, PART 1

a. P1,610,000 b. P2,484,000 c. P2,825,000 d. P5,000,000

7. On December 31, 2014, LAC Company sold a machine to Detroit Company in exchange for a noninterest bearing
note requiring ten annual payments of P 100,000. Detroit Company made the first payment on December 31,
2014. The market interest rate for similar notes at date of issuance was 8%.
The interest income to be reported in the 2016 comprehensive income statement
a. P41,651 b. P45,973 c. P49,975 d. P80,000
8. On December 31, 2015, AAA Company sold an equipment in exchange for a noninterest bearing note requiring
five annual payments of P500,000. The first payment was made on December 31, 2015. The market interest for
similar notes was 8%. What is the carrying value of the note on December 31, 2016 (round off present value
factors to two decimal places)?
a. P1,287,400 b. P1,614,600 c. P1,655,000 d. P1,787,400
9. AAA Company sold equipment with a carrying amount of P800,000, receiving a noninterest-bearing note due in
three years with a face amount of P1,000,000. There is no established market value for the equipment. The
interest rate on similar obligations is estimated at 12%. The present value of 1 at 12% for three periods is .712.
The gain or loss on the sale and interest income for the first year
a. P200,000 gain and P288,000 c. P88,000 loss and P85,440
b. P200,000 gain and P96,000 d. P88,000 loss and P120,000
10. On January 1, 2015, AAA Company sold a building and received P 1,000,000 cash and a P4,000,000 noninterest
bearing note due on January 1, 2016. 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 of January 1, 2015 was 10%. The present
value of 1 at 10% for three periods is 0.75.
Interest revenue included in the 2016 income statement is
a. P300,000 b. P330,000 c. P370,000 d. P400,000
11. AAA Company sold equipment on December 30, 2016 in exchange for a non-interest bearing note requiring ten
annual payments of P 200,000. The first collection was made on December 30, 2016. The market interest rate for
similar notes was 8%.
In its December 31, 2016 statement of financial position, what amount should AAA report as note receivable?
a. P900,000 b. P920,000 c. P1,250,000 d. P1,342,000
12. On December 31, 2016, AAA 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 from BBB Company, made under customary trade terms, is due in nine
months and the note from CCC Company is due in five years. The market interest rate for similar notes on
December 31, 2016 was 8%.
The amount reported as notes receivable in the December 31, 2016 statement of financial position is (Round off
present value factors to three decimal places)
BBB CCC BBB CCC
a. P944,000 P680,000 c. P1,000,000 P680,000
b. P965,200 P782,000 d. P1,000,000 P782,000
Use the following to answer the next two questions
On January 2, 2016 AAA Company sold equipment with a carrying amount of P6,500,000 in exchange for P8,000,000
noninterest bearing note due January 2, 2019. There was no established exchange price for the equipment. The
prevailing interest rate for this note on January 2, 2016 was 10%. The present value of 1 at 10% for three periods is
0.75.
13. In the 2016 statement of comprehensive income, what amount should be reported as interest income?
a. P800,000 b. P740,000 c. P660,000 d. P600,000
14. In the 2016 statement of comprehensive income, what amount should be reported as gain or loss on sale of
equipment?
a. P1,500,000 gain b. P500,000 gain c. P100,000 gain d. P500,000 loss
15. AAA Company has a 10% note receivable dated June 30, 2014, in the original amount of P9,000,000. Payments
of P3,000,000 in principal plus accrued interest are due annually on July 1, 2011, 2016 and 2013. In its June 30,
2016 statement of financial position, what amount should AAA report as a current asset for interest on the note
receivable?
a. P900,000 b. P600,000 c. P300,000 d. P0

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