Notes Receivable
Exercise 1
Feasible Company sold to another entity a tract of land costing P5,000,000 for P7,000,000 on January 1, 2020.
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 1, 2022.
Required:
Prepare journal entries for 2020, 2021 and 2022.
Journal Entries:
First Year- 2020
To record the sale
Cash 1,000,000
Note Receivable 6,000,000
Land 5,000,000
Gain on sale of land 2,000,000
Accrued Interest Receivable 720,000
Interest Income 720,000
(12% x 6,000,000)
2nd Year-2021
Accrued interest receivable 806,400
Interest Income 806,400
Face Value 6,000,000
Interest accrued for first year 720,000
Total: 6,720,000
Interest for second year
(12% x 6,720,000) 806,400
Second Year- 2022
Cash 8,429,568
Notes Receivable 6,000,000
Accrued interest receivable 1,526,400
Interest Income 903,168
Face Value 6,000,000
Interest Accrued:
First Year 720,000
Second Year 806,400 1,526,400
Total 7,526,400
Interest for third year
(12% x 7,526,400) 903,168
Cash Received 8,429,568
Exercise 2
Bygone Company manufactures and sells computers. On January 1, 2020, the entity sold a computer costing P400,000 for P60
The buyer signed a noninterest bearing note for P600,000 payable in three equal installments every December 31.
The cash selling price of the computer is P540,000.
Required:
Prepare journal entries for the current year.
Journal Entries:
To record the sale
Note receivable 600,000
Sales 540,000
Unearned interest income 60,000
To record the first installment collection
Cash 200,000
Notes Receivable 200,000
To record the interest income
Unearned Interest income 30,000
Interest Income 30,000
Face value of note 600,000
Present value-cash sell price 540,000
Unearned Interest Income 60,000
Cash sale price 540,000
Cost of computer 400,000
Gross Income 140,000
2020 600,000 3/6 30,000
2021 400,000 2/6 20,000
2022 200,000 1/6 10,000
60,000
Exercise 3
Innovative Company manufactures and sells electrical generators. On January 1, 2020, the entity sold an electrical genrator co
The buyer paid P100,000 down and signed a P900,000 noninterest bearing note payable in three equal installments every Dec
The prevailing interest rate for a note of this type is 12%. The present value of an ordinary annuity of 1 for three periods is 2.4
Required:
Prepare journal entries for current year.
Journal Entries
First Year-2020
To record the sale of equipment
Cash 100,000
Notes Receivable 900,000
Sales 820,540
Unearned Interest Income 179,460
Face value of note 900,000
Present value of note
(300,000 x 2.4018) 720,540
179,460
Present value of note 720,540
Cash received-down payment 100,000
Sale price 820,540
Cost of equipment 700,000
Gain on sale of equipment 120,540
To record the first installment collection
Cash 100,000
Notes Receivable 100,000
To record the interest income for 2020
Unearned Interest Income 86,464.8
Interest Income 86.464.8
Exercise 4
Gullible Company is a dealer in equipment. On December 31, 2020, the entity 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, 2021.
The market interest for similar notes was 8%. The relevant present value factors are:
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.39.
Required:
Prepare journal entries for 2020 and 2021.
Determine the carrying amount of the note receivable on December 31, 2021.
Determine the interest income for 2022.
Journal Entries for 2020
hange for a
Note Receivable 2,500,000
Sales 1,995,000
Unearned Interest Income 505,000
Annual Payment 500,000
PV of OA 3.99
Carrying amount 1,995,000
Journal Entries for 2021
Cash 500,000
Unearned Interest Income 159,600
Notes Receivable 500,000
Interest Income 159,600
Note Receivable 2,000,000
Unearned Interest Income 345,400
Carrying Amount 1,654,600
Rate 8%
Interest Income for 2022 132,368
Exercise 5
On January 1, 2020, Enigma Company sold an equipment costing P500,000 which had a carrying amount of P350,000, receivin
down payment and, as additional consideration, a P400,000 noninterest bearing note due on January 1, 2023.
There was no established exchange price for the equipment, and the note had no ready market.
The prevailing rate of interest for a note of this type at January 1, 2020 was 12%.
The present value of 1 at 12% for three periods is 0.7118.
Required:
Prepare Journal Entries for 2020, 2021, 2022, and 2023.
Journal Entries for 2020
Cash 125,000
Note Receivable 400,000
Accumulated Depreciation 150,000
Equipment 500,000
Gain on sale of equipment 59,720
Unearned Interest Income 115,280
Face value of note 400,000
Present value(400,000 x 0.7118) 284,720
Unearned Interest Income 115,280
Present value of note 284,720
Cash Received 125,000
Sale price 409,720
Carrying amount of equipment 350,000
Gain on sale of equipment 59,720
Unearned Interest Income 34,166
Interest Income 34,166
Date Interest Income Unearned Interest Present Value
Jan. 1, 2020 115,280 284,720
Dec. 31, 2020 34,166 81,114 318,886
Dec. 31, 2021 38,266 42,848 357,152
Dec. 31, 2022 42,848 400,000
2021
Unearned Interest Income 38,266
Interest Income 38,266
2022
Unearned Interest Income 42,848
Interest Income 42,848
2023
Cash 400,000
Note Receivable 400,000
