INTERMEDIATE ACCOUNTING 2

QUIZ #3: NOTES PAYABLE (CHAPTER 2)

QUIZ #3

1. Which of the following represents a liability?

a. The obligation to pay interest on a five-year note payable that was issued on the last day of the current
year.
b. The obligation to pay for goods that an entity expects to order from suppliers next year.
c. The obligation to deliver goods that customers have ordered and paid for during the current year.
d. The obligation to distribute own shares of stocks next year as a result of a dividend declaration near the
end of the current year.

2. On January 1, 20x1, Washy-washy Co. acquired a washing machine by paying cash of ₱400,000 and issuing a
noninterest-bearing note of ₱4,000,000 due on January 1, 20x4. The effective interest rate on the note is 12%.
How much is the interest expense in 20x1?
a. 341,656
b. 389,654
c. 334,357
d. 480,000

Future cash flow (face amount) 4,000,000

PV of P1 @12, n=3 0.711780247
Present value of note payable, Jan.1,20x1 2,847,121

Date Interest Expense Discount Present Value

1/1/21 1,152,879 2,847,121
12/31/21 341,655 811,224 3,188,776
12/31/22 382,653 428,572 3,517,429
12/31/23 428,571 0 4,000,000
1,152,879

3. On January 1, 20x1, Spin Co. acquired an intangible asset by paying cash of ₱400,000 and issuing a
noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments. The first installment is due on
January 1, 20x1, while the succeeding installments are due every December 31. The effective interest rate is 12%.
How much is the carrying amount of the note on December 31, 20x1?
a. 2,401,832
b. 2,179,830
c. 2,188,776
d. 1,690,051

Future cash flow, annual installment (4M / 4 equal annual installment) 1,000,000
PV of n annuity due @12, n = 4 3.401831268
Present value of note payable, Jan.1,2021 3,401,831

Date Payments Interest expense Amortization Present value

1/1/21 3,401,831
1/1/21 1,000,000 - 1,000,000 2,401,831
12/31/21 1,000,000 288,220 711,780 1,690,051
12/31/22 1,000,000 202,806 797,194 892,857
12/31/23 1,000,000 107,143 892,857 0
 INTERMEDIATE ACCOUNTING 2
QUIZ #3: NOTES PAYABLE (CHAPTER 2)
4. On January 1, 20x1, Bath Co. issued a ₱4,800,000 noninterest-bearing note due in six equal semi-annual
payments starting July 1, 20x1. The effective interest rate is 10%. How much is the carrying amount of the note on
December 31, 20x1?
a. 3,463,580
b. 2,279,830
c. 3,343,341
d. 2,836,761

Future cash flow, annual installment (4,800,000 / 6) 800,000

PV of ordinary annuity @10%, n = 6 5.075692067
Present value of note payable, Jan.1,20x1 4,060,554

Date Payments Interest expense Amortization Present value

1/1/21 4,060,554
7/1/21 800,000 203,028 596,972 3,463,582
12/31/21 800,000 173,179 626,821 2,836,761
7/1/22 800,000 141,838 658,162 2,178,599
12/31/22 800,000 108,930 691,070 1,487,529
7/1/23 800,000 74,376 725,624 761,905
12/31/23 800,000 38,095 761,905 0

5. On January 1, 20x1, Warehouse Co. acquired a machine in exchange for a ₱4,800,000 noninterest-bearing note
due as follows:
Date Amount
December 31, 20x1 ₱ 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total ₱ 4,800,000

The prevailing rate of interest of this type of note is 10%. How much is the interest expense in 20x1?
a. 400,000
b. 479,340
c. 410,581
d. 410,518

Date Cash flows PV OF P1 @10%, n=1 to 3 Present value

December 31,2021 2,400,000 0.90909 2,181,818
December 31,2022 1,600,000 0.82645 1,322,314
December 31,2023 800,000 0.75131 601,052
Totals 4,800,000 4,105,184

Date Payments Interest expense Amortization Present value

1/1/21 4,105,184
12/31/21 2,400,000 410,518 1,989,482 2,115,702
12/31/22 1,600,000 211,570 1,388,430 727,272
12/31/23 800,000 72,727 727,273 0

6. Tweet Co. acquired a machine on January 1, 20x1 by paying cash of ₱400,000 and issuing a noninterest-
bearing note of ₱4,000,000 due in 4 equal annual installments starting on December 31, 20x1. The prevailing rate
of interest for this type of note is 12%. How much is the noncurrent portion of the note on December 31, 20x1?
a. 1,468,050
b. 1,476,996
c. 1,683,508
d. 1,690,051

Future cash flow, annual installment (4M / 4) 1,000,000

PV of ordinary annuity @12, n=4 3.037349347
Present value of note payable, Jan.1,20x1 3,037,349
 INTERMEDIATE ACCOUNTING 2
QUIZ #3: NOTES PAYABLE (CHAPTER 2)

Date Payments Interest expense Amortization Present value

1/1/21 3,037,349
12/31/21 1,000,000 364,482 635,518 2,401,831
12/31/22 1,000,000 288,220 711,780 1,690,051
12/31/23 1,000,000 202,806 797,194 892,857
12/31/24 1,000,000 107,143 892,857 0

Noncurrent portion = 2,401,831 – 711,780 = 1,690,051

7. SUCCOR Co. borrowed cash from RELIEF, Inc., a related party, and issued a 3-year, noninterest-bearing note of
₱5,000,000 due on December 31, 20x3. The prevailing interest for similar type of obligation is 12%. Prepare all the
relevant journal entries for the entire term of the note.

Future cash flow (face amount) 5,000,000

PV of P1 @12, n=3 0.711780247
Present value of note payable, Jan.1,20x1 3,558,901

Date Interest Expense Discount Present Value

1/1/21 1,441,099 3,558,901
12/31/21 427,068 1,014,031 3,985,969
12/31/22 478,316 535,715 4,464,285
12/31/23 535,714 0 5,000,000
1,441,099

1/1/21
Cash 5,000,000
Discount on notes payable 1,441,099
Notes payable 5,000,00
Unrealized gain 1,441,099
To record the note payable

12/31/21
Interest expense 427,068
Discount on notes payable 427,068

12/31/22 478,316
Interest expense 478,316
Discount on notes payable

12/31/23 535,714
Interest expense 535,714
Discount on notes payable

Notes payable 5,000,000

Cash 5,000,000

8. On January 1, 20x1, SAVOR TASTE Co. acquired a machine by issuing a 4-year, 10%, ₱5,000,000 note
payable. Principal is due on January 1, 20x4 but interests are to be paid in advance every January 1. The prevailing
interest rate for this type of note is 12%. Prepare all the relevant journal entries for the entire term of the note.
 INTERMEDIATE ACCOUNTING 2
QUIZ #3: NOTES PAYABLE (CHAPTER 2)

9. On January 1, 20x1, SEEMLY HANDSOME Co., issued a ₱12,000,000 non-interest bearing note that is due in
three annual installments as follows:
Date Amount
January 1, 20x4 ₱ 6,000,000
January 1, 20x5 4,000,000
January 1, 20x6 2,000,000
Total ₱12,000,000
The effective interest rate is 10%. Prepare all the relevant journal entries for the entire term of the note.