QUIZ No.

1 : NOTES AND LOANS RECEIVABLE

1. On October 1 of the current year, an entity 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 September 30 of next year. The
interest receivable account on December 31 of the current year would consist of
an amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess at October 1 of the present value of the note receivable over
its face value
Answer : A

2. Accounting for the interest in a noninterest bearing note receivable is an

example of what aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance
Answer : C

3. On July 1 of the current year, an entity 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 June 30 of next year. The interest
receivable account would show a balance on
a. July 1 but not December 31 of the current year
b. December 31 but not July 1 of current year
c. July 1 and December 31 of the current year
d. Neither July 1 nor December 31 of the current year
Answer : B

4. On July 1 of the current year, an entity received a one-year note receivable

bearing interest at the market rate. The face amount of the note receivable and
the entire amount of interest are due in one year. When note receivable was
recorded on July 1, which of the following was debited?
a. Interest receivable
b. Unearned discount on note receivable
c. Both interest receivable and unearned discount on note receivable
d. Neither interest receivable nor unearned discount on note receivable
Answer : D

5. A loan receivable is initially measured at

a. Fair value
b. Fair value plus transaction cost
 c. Fair value minus transaction cost
d. Present value
Answer : B

6. In calculating the carrying amount of loan receivable, the lender adds to the
principal
a. Direct loan origination cost incurred by the lender
b. Indirect loan origination cost incurred by the lender
c. Loan origination fee charged to the borrower
d. Interest incurred by the borrower
Answer : A

7. A loan receivable shall be measured subsequently at

a. Cost
b. Amortized cost using the straight line method
c. Amortized cost using the effective interest method
d. Fair value
Answer : C

8. Depending on certain criteria, a note receivable discounted with recourse is

recognized as
a. Conditional sale
b. Secured borrowing
c. Either as conditional sale or secured borrowing
d. Neither conditional sale nor secured borrowing
Answer : C

9. IF a note receivable is discounted without recourse

a. The contingent liability may be disclosed.
b. Liability for note receivable discounted should be credited.
c. Note receivable should be credited.
d. The transaction should be accounted for as a borrowing.
Answer : C

10.A 90-day 15% interest-bearing note receivable is sold to a bank without recourse
after being held for 60 days. The proceeds are calculated using a 12% interest
rate. The amount credited to note receivable at the date of the discounting
transaction would be
a. The same as the cash proceeds
b. Less than the face value of the note
c. The face value of the note
d. The maturity value of the note
Answer : C

11.A note receivable bearing a reasonable interest rate is sold to a bank wit
recourse. At the date of the discounting, the note receivable discounted account
should be
 a. Decreased by the net proceeds from discounting
b. Increased by the net proceeds from discounting
c. Increased by the face amount of the note
d. Decreased by the face amount of the note
Answer : C

12.After being held for 30 days a 120-day 12% interest bearing note receivable was
discounted at a bank at 15%. The amount received from the bank is equal to
a. Maturity value less discount at 12%
b. Maturity value less discount at 15%
c. Face value less discount at 12%
d. Face value less discount at 15%
Answer : B

13.On July 1 of the current year, an entity 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 June 30 of next year. On December
31 of the current year, the entity should report in the statement of financial
position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of
next year
d. Interest receivable for the interest accruing this year
Answer : D

14.Charity Company has an 8% note receivable dated June 30, 2020, in the original
amount of P1,500,000. Payments of P500,000 in principal plus accrued interest
are due annually on July 1, 2021, 2022 and 2023. In the June 30, 2022
statement of financial position, what amount should be reported as a current
asset for interest on the note receivable?

Answer : 80,000

(1,500,000 – 500,000 = 1,000,000 x 8% = 80,000)

15. Charity Company has an 8% note receivable dated June 30, 2020, in the
original amount of P1,500,000. Payments of P500,000 in principal plus accrued
interest are due annually on July 1, 2021, 2022 and 2023. In the June 30, 2022
statement of financial position, what amount should be reported as a current
asset for interest on the note receivable?

Answer : 80000

(1,500,000 – 500,000 = 1,000,000 x 8% = 80,000 x 6/12 = 40,000)

16.On June 1, 2020, Charity Company loaned P500,000 on a 12% note, payable in
five equal annual installments of P100,000 beginning January 1, 2021. Interest
on the note is payable on the first day of each month beginning July 1, 2020.
The borrower made timely payments through November 1, 2020. On January 1,
2021, the entity received payment of the first principal installment plus all
interest due. On December 31, 2020, what amount should be reported as
accrued interest receivable?
Answer : 10,000

(500,000 x 12% x 2/12 = 10,000)

17.On June 1, 2020, Charity Company loaned P500,000 on a 12% note, payable in
five equal annual installments of P100,000 beginning January 1, 2021. Interest
on the note is payable on the first day of each month beginning July 1, 2020.
The borrower made timely payments through November 1, 2020. On January 1,
2021, the entity received payment of the first principal installment plus all
interest due. For the year end December 31, 2020, what amount should be
reported as interest income for this note?

Answer : 35,000

(500,000 x 12% x 7/12 = 35,000)

18.Charity Company sold an 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. What amount of interest income should be
reported for the first year?

Answer : 85,440

(1,000,000 x .712 = 712,000 x 12%)

19.Charitable Bank granted a 10-year loan to Chaste 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. Charitable Bank incurred P40,000 of direct loan
origination cost and P20,000 of indirect loan origination cost. In addition, the
bank charged Chaste Company a 4% nonrefundable loan origination fee. What
is the initial carrying amount of the loan receivable to reported by Charitable
Bank?

Answer : 1,480,000

(1,500,000 + 40,000 – (1,500,000 x 4%) = 1,480,000

20.On January 1, 2020, Charitable Bank made a P1,000,000, 8% loan. The P80,000
interest is receivable at the end of each year, with the principal amount to be
received at the end of five years. On December 31, 2020, the first year’s
interest of P80,000 has not yet been received because the borrower is
experiencing financial difficulties. The borrower negotiated a restructuring of the
loan. The payment of all of the interest for 5 years will be delayed until the end
of the 5-year loan term. In addition, the amount of principal repayment will be
dropped from P1,000,000 to P500,000. The PV of 1 at 8% for 4 periods is .735,
and the PV of 1 at 8% for 5 periods is .68. No interest revenue has been
recognized in 2020 in connection with the loan. What is the loan impairment loss
for 2020?

Answer : 338,500

21.On January 1, 2020, Charitable Bank made a P1,000,000, 8% loan. The P80,000
interest is receivable at the end of each year, with the principal amount to be
received at the end of five years. On December 31, 2020, the first year’s
interest of P80,000 has not yet been received because the borrower is
experiencing financial difficulties. The borrower negotiated a restructuring of the
loan. The payment of all of the interest for 5 years will be delayed until the end
of the 5-year loan term. In addition, the amount of principal repayment will be
dropped from P1,000,000 to P500,000. The PV of 1 at 8% for 4 periods is .735,
and the PV of 1 at 8% for 5 periods is .68. No interest revenue has been
recognized in 2020 in connection with the loan. What is interest income for
2021?

Answer : 52,920

22.On January 1, 2020, Charity Company sold equipment to a customer for

P1,000,000. The entity accepted a 10% note receivable for the entire sale price.
This note is payable in two equal installments of P500,000 plus accrued interest
on December 31, 2020 and December 31, 2021. The first installment collection
was made on December 31, 2020. On July 1, 2021, the entity discounted the
note at a bank at an interest rate of 12%. What is the amount received from the
discounting of note receivable?

Answer : 517,000

MV = (1,000,000 – 500,000 x 10% x 12/12 ) + 500,000 = 550,000

Discount = 550,000 x 12% x 6/12 = 33,000
Net Proceeds = 517,000

23.Pink Company has an 8% note receivable dated June 30, 2019, in the original
amount of P600,000. Payments of P200,000 in principal plus accrued interest
are due annually on July 1, 2020, 2021, and 2022. In its June 30, 2020
statement of financial position, what amount should Pink Company report as a
current asset for interest on the note receivable?
 Answer : 32,000

(600,000 – 200,000) x 8% = 32,000

24.Pink Company accepted a P200,000, 90-day, 12% interest bearing note dated
November 15, 2019 from a customer. On December 15, 2019, Pink discounted
the note with recourse at a Bank Company at 15% discount rate. On maturity
date, the maker of the note did not pay the note and as a result, Bank Company
charged Pink Company for the total amount due plus P2,000 protest fee. How
much should Pink Company pay to Bank Company when the maker fails to pay
the note upon its maturity?

Answer : 208,000

MV = 206,000 (Int = 200,000 x 12% x 90/360) + Protest Fee of 2,000

25.Pink Company accepted a P200,000, 90-day, 12% interest bearing note dated
November 15, 2019 from a customer. On December 15, 2019, Pink discounted
the note without recourse at a Bank Company at 15% discount rate. What
amount of interest income should Pink Company recognize related to the notes
receivable in its December 31, 2019 statement of financial position?
Answer : 3,000

2,000 x 12% x 45/360

26.On January 2, 2019. Black Company sold equipment with a carrying amount of
P480,000 in exchange for a P600,000 non-interest bearing note due January 2,
2022. There was no established exchange price for the equipment. The
prevailing rate of interest for a note of this type at January 2, 2019 was 10%.
The present value of 1 at 10% for three periods is 0.7513.

How much should Black Company report as interest income in its 2019 profit or
loss? Answer should be rounded off to the nearest peso (no decimal places)

Answer : 45,078

600,000 x .7513 = 450,780 x 10% = 45,078

27.On January 2, 2019. Black Company sold equipment with a carrying amount of
P480,000 in exchange for a P600,000 non-interest bearing note due January 2,
2022. There was no established exchange price for the equipment. The
prevailing rate of interest for a note of this type at January 2, 2019 was 10%.
The present value of 1 at 10% for three periods is 0.7513.
 How much should Black Company report as gain or loss on sale of equipment in
its 2019 statement of financial performance? Answer should be rounded off to
the nearest peso (no decimal places). Place a negative (-) sign if your answer is
a loss.

Answer : (29,280) Loss

450,780 – CA 480,000 = 29,280 loss

28.True or False : A loan receivable shall be measured subsequently at amortized

cost using the straight line method.

Answer : False

29.True or False : If a note receivable is discounted without recourse, Note

Receivable Discounted account should be credited.

Answer : False

30.True or False : In discounting of note receivable, the interest income is credited

for the actual interest earned on the date of discounting.
Answer : True