Sample Problem: Accounting for Notes Receivable

Hope Company is a dealer in equipment. On December 31, 2019 the entity sold an equipment:
a. in exchange for a P500,000, 180-day, 12% note.
b. in exchange for a P500,000, 180-day, non-interest bearing note; cash selling price for this equipment is
P450,000.
c. in exchange for a P500,000, 5-year, 12% note; interest is payable annually.
d. in exchange for a P500,000, 5 year, 12% note; interest is compounded annually.

e. in exchange for a P500,000, 12% note payable in 5 equal annual installments starting December 31, 2020.
f. in exchange for a P500,000, non-interest bearing note payable in lump-sum on December 31, 2024.
Prevailing interest rate for this type of note is 10%.
g. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting
December 31, 2020. Prevailing interest rate for this type of note is 10%.
h. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting
December 31, 2019. Prevailing interest rate for this type of note is 10%.
i. in exchange for a P500,000, non-interest bearing note payable in 5 installments as follows:
31-Dec-20 200,000
31-Dec-21 100,000
31-Dec-22 100,000
31-Dec-23 50,000
31-Dec-24 50,000
Total 500,000
Prevailing interest rate for this type of note is 10%.
j. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting
December 31, 2020. The cash selling price for this equipment is P450,000.
k. in exchange for a P500,000, 5-year, 4% note; interest is payable annually. Prevailing market rate of
interest for this type of note is 10%.
l. in exchange for a P500,000, 5-year, 4% note; interest and principal are payable annually. Prevailing market
rate of interest for this type of note is 10%.
Hope Company is a dealer in equipment. On December 31, 2019 the entity sold an equipment:
a. in exchange for a P500,000, 180-day, 12% note.
2019
Dec 31 Notes Receivable 500,000
Sales 500,000

Maturity date determination

Jan 31 Term 180
Feb 29 Days as of May 31 152
Mar 31 Maturity Date: June 28
Apr 30
May 31
Total 152

2020
Jun 28 Cash 530,000
Notes Receivable 500,000
Interest Income 30,000

b. in exchange for a P500,000, 180-day, non-interest bearing note; cash selling price for this equipment is P450,000.
2019
Dec 31 Notes Receivable 500,000
Sales 450,000
Unearned Interest Income 50,000
2020
Jun 28 Cash 500,000
Notes Receivable 500,000

Unearned Interest Income 50,000

Interest Income 50,000

c. in exchange for a P500,000, 5-year, 12% note; interest is payable annually.

2019
Dec 31 Notes Receivable 500,000
Sales 500,000

2020 Cash 60,000

Dec 31 Interest Income 60,000

every year for 5 years or until December 31, 2024.

2024
Dec 31 Cash 500,000
Notes Receivable 500,000
d. in exchange for a P500,000, 5 year, 12% note; interest is compounded annually.
2019
Dec 31 Notes Receivable 500,000
Sales 500,000

Accrued
Date Principal Interest Carrying Amount
12/31/2019 500,000 500,000
12/31/2020 60,000.00 560,000.00
12/31/2021 67,200.00 627,200.00
12/31/2022 75,264.00 702,464.00
12/31/2023 84,295.68 786,759.68
12/31/2024 94,411.16 881,170.84
381,170.84

To record accrual of interest:

2020 2021
Dec 31 Interest Receivable 60,000.00 67,200
Interest Income 60,000

To record collection:
2024
Dec 31 Cash 881,170.84
Interest Receivable 286,759.68
Interest income 94,411.16
Notes Receivable 500,000

e. in exchange for a P500,000, 12% note payable in 5 equal annual installments starting December 31, 2020.
2019
Dec 31 Notes Receivable 500,000
Sales 500,000

Outstanding
Date Balance Interest
12/31/2019
12/31/2020 500,000 60,000
12/31/2021 400,000 48,000
12/31/2022 300,000 36,000
12/31/2023 200,000 24,000
12/31/2024 100,000 12,000

To record collection of interest-

2020 2021
Dec 31 Cash 60,000 48,000
Interest Income 60,000
To record collection:
2024
Dec 31 Cash 512,000
Interest Income 12,000
Notes Receivable 500,000

f. in exchange for a P500,000, non-interest bearing note payable in lump-sum on December 31, 2024. Prevailing interest rate f
note is 10%.
Determine the Present Value (PV) of the NR:
PV = Lump sum payment x PVf of 1 for 5 periods at 10%
500,000 x 0.6209
310,450

Face Value 500,000

Present Value 310,450
Unearned Interest Income 189,550

Amortizati0n Table

Unearned
Interest Interest
Date Income Income PV Bal
12/31/2019 189,550 310,450
12/31/2020 31,045.0 158,505.0 341,495.0
12/31/2021 34,149.5 124,355.5 375,644.5
12/31/2022 37,564.5 86,791.1 413,209.0
12/31/2023 41,320.9 45,470.2 454,529.8
12/31/2024 45,453.0 17.2 499,982.8

2020
Dec 31 Notes Receivable 500,000
Sales 310,450
Unearned Interest Income 189,550

To record amortization of interest:

2020 2021
Dec 31 Unearned Interest Income 31,045.0 34,150
Interest Income 31,045

To record collection:
2024
Dec 31 Cash 500,000
Notes Receivable 500,000
g. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting December 31, 2020. P
interest rate for this type of note is 10%.
PV = Periodic Payment x PVF of annuity of 1 for 5 periods at 10%
100,000 x 3.7908
379,080

Face Value 500,000

Present Value 379,080
Unearned Interest Income 120,920

Amortization Table
Interest
Date Collection Income Principal PV Balance
12/31/2019 379,080
12/31/2020 100,000 37,908.0 62,092.0 316,988.0
12/31/2021 100,000 31,698.8 68,301.2 248,686.8
12/31/2022 100,000 24,868.7 75,131.3 173,555.5
12/31/2023 100,000 17,355.5 82,644.5 90,911.0
12/31/2024 100,000 9,088.97 90,911.0 -

2020
Dec 31 Notes Receivable 500,000
Sales 379,080
Unearned Interest Income 120,920

To record periodic collection:

2020 2021
Dec 31 Unearned Interest Income 37,908.0 31,699
Interest Income 37,908

Cash 100,000 100,000

Notes Receivable 100,000

h. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting December 31, 2019. P
interest rate for this type of note is 10%.
PV = Periodic Payment x (PVF of annuity of 1 for 4 periods at 10% +1)
100,000 x (3.1699 +1)
100,000 x 4.1699
416,990

Face Value 500,000

Present Value 416,990
Unearned Interest Income 83,010
Amortization Table
Interest
Date Collection Income Principal PV Balance
12/31/2019 416,990
12/31/2019 100,000 0 100,000 316,990
12/31/2020 100,000 31,699.0 68,301.0 248,689.0
12/31/2021 100,000 24,868.9 75,131.1 173,557.9
12/31/2022 100,000 17,355.8 82,644.2 90,913.7
12/31/2023 100,000 9,086.31 90,913.7 -
12/31/2024 - - -

2019
Dec 31 Notes Receivable 500,000
Sales 416,990
Unearned Interest Income 83,010

Cash 100,000
Notes Receivable 100,000

To record periodic collection:

2020 2021
Dec 31 Unearned Interest Income 31,699.0 24,869
Interest Income 31,699

Cash 100,000 100,000

Notes Receivable 100,000

i. in exchange for a P500,000, non-interest bearing note payable in 5 installments as follows:

31-Dec-20 200,000
31-Dec-21 100,000
31-Dec-22 100,000
31-Dec-23 50,000
31-Dec-24 50,000
Total 500,000
Prevailing interest rate for this type of note is 10%.

Computation of Present Value:

# of periods for
PVF PFV of 1 at
Date Collection determination 10% PV
31-Dec-20 200,000 1 0.9091 181,820
31-Dec-21 100,000 2 0.8264 82,640
31-Dec-22 100,000 3 0.7513 75,130
31-Dec-23 50,000 4 0.6830 34,150
31-Dec-24 50,000 5 0.6209 31,045
 404,785
Face Value 500,000
Present Value 404,785
Unearned Interest Income 95,215

Amortization Table
Interest
Date Collection Income Principal PV Balance
12/31/2019 404,785
12/31/2020 200,000 40,478.50 159,521.5 245,263.50
12/31/2021 100,000 24,526.35 75,473.7 169,789.85
12/31/2022 100,000 16,978.99 83,021.0 86,768.84
12/31/2023 50,000 8,676.88 41,323.1 45,445.72
12/31/2024 50,000 4,554.28 45,445.7 -

2019
Dec 31 Notes Receivable 500,000
Sales 404,785
Unearned Interest Income 95,215

To record periodic collection:

2020 2021
Dec 31 Unearned Interest Income 40,478.5 24,526.35
Interest Income 40,478.50

Cash 200,000 100,000

Notes Receivable 200,000

j. in exchange for a P500,000, non-interest bearing note payable in 5 equal annual installments starting December 31, 2020. T
price for this equipment is P450,000.
PV = 450,000
PV = Periodic Payment x PVF of annuity of 1 for 5 periods at _____ interest rate
450,000 = 100,000 x PVF
100,000 100,000
Periodic
EIR is between Payment
PVF = 4.5 at 3% 4.5797 100,000
at 4% 4.4518 100,000
EIR 4.5 100,000
Amortization Table
Interest
Date Collection Income Principal PV Balance
12/31/2019 450,000
12/31/2020 100,000 16,304.0 83,696.1 366,304.0
12/31/2021 100,000 13,271.6 86,728.4 279,575.5
12/31/2022 100,000 10,129.3 89,870.7 189,704.8
12/31/2023 100,000 6,873.2 93,126.8 96,578.0
12/31/2024 100,000 3,422.00 96,578.0 -

2020
Dec 31 Notes Receivable 500,000
Sales 450,000
Unearned Interest Income 50,000

To record periodic collection:

2020 2021
Dec 31 Unearned Interest Income 16,304.0 13,271.56
Interest Income 16,303.95

Cash 100,000 100,000

Notes Receivable 100,000

k. in exchange for a P500,000, 5-year, 4% note; interest is payable annually. Prevailing market rate of interest for this type of n

Thus, EIR = 10%

Date Cash Flows Total Cash Flows

Interest Principal PV of 1 at 10% PV
12/31/2019 - - - or since interest payment is equal ev
12/31/2020 20,000 20,000 0.9091 18,182 PV of interest
12/31/2021 20,000 20,000 0.8264 16,528
12/31/2022 20,000 20,000 0.7513 15,026
12/31/2023 20,000 20,000 0.683 13,660 PV of Principal
12/31/2024 20,000 500,000 520,000 0.6209 322,868
386,264
FV 500,000 PV
PV 386,264
Unearned Interest 113,736

Amortization Table

Other
Formula for
Carrying or
Unearned PV Balance:
Interest Income Carrying Face Value -
Interest Amortization Amount Balance of
Income (PV (Interest Income (Previous PV Unearned
Interest Balance x EIR - Interest Balance + UII Interest
Date Received of 10%) Received) Amortization) Income
12/31/2019 386,264 Cash
12/31/2020 20,000 38,626.40 18,626.40 404,890.40 Interest Income
12/31/2021 20,000 40,489.04 20,489.04 425,379.44
12/31/2022 20,000 42,537.94 22,537.94 447,917.38 UII
12/31/2023 20,000 44,791.74 24,791.74 472,709.12 II
12/31/2024 20,000 47,290.88 27,290.88 500,000.00

l. in exchange for a P500,000, 5-year, 4% note; interest and principal are payable annually. Prevailing market rate of interest fo
note is 10%.

Thus, EIR = 10%

Date Cash Flows Total Cash Flows
Interest Principal PV of 1 at 10% PV
12/31/2019 - - -
12/31/2020 20,000 100,000 120,000 0.9091 109,092
12/31/2021 16,000 100,000 116,000 0.8264 95,862
12/31/2022 12,000 100,000 112,000 0.7513 84,146
12/31/2023 8,000 100,000 108,000 0.683 73,764
12/31/2024 4,000 100,000 104,000 0.6209 64,574
427,438

FV 500,000
PV 427,438
Unearned Interest 72,562

Amortization Table

Unearned
Interest Interest Interest Income Principal Carrying
Date Received Income Amortization Payment Amount
12/31/2019 427,438
12/31/2020 20,000 42,743.76 22,743.76 100,000.00 350,181.36
12/31/2021 16,000 35,018.14 19,018.14 100,000.00 269,199.50
12/31/2022 12,000 26,919.95 14,919.95 100,000.00 184,119.45
12/31/2023 8,000 18,411.94 10,411.94 100,000.00 94,531.39
12/31/2024 4,000 9,468.61 5,468.61 100,000.00 - zero
60,000 132,562.40 72,562.40
ment:

s equipment is P450,000.
 2021 2022 2023
75,264 84,295.68
67,200 75,264 84,295.68

ecember 31, 2020.

2021 2022 2023

36,000 24,000
48,000 36,000 24,000
r 31, 2024. Prevailing interest rate for this type of

2021 2022 2023 2024

37,564 41,320.9 45,453.0
34,150 37,564 41,320.9 45,453.0
ments starting December 31, 2020. Prevailing

2021 2022 2023 2024

24,869 17,355.5 9,089.0
31,699 24,869 17,355.5 9,089.0

100,000 100,000 100,000

100,000 100,000 100,000 100,000

ments starting December 31, 2019. Prevailing

ods at 10% +1)

 2021 2022 2023 2024
17,356 9,086.3 -
24,869 17,356 9,086.3 -

100,000 100,000 -
100,000 100,000 100,000 -

s:
 2021 2022 2023 2024
16,978.99 8,676.88 4,554.28
24,526.35 16,978.99 8,676.88 4,554.28

100,000 50,000 50,000

100,000 100,000 50,000 50,000

ents starting December 31, 2020. The cash selling

ds at _____ interest rate

PV Interpolation:
457,970 450,000 - 457,970
445,180 445,180 - 457,970
450,000
(7,970)
(12,790)

0.62314308 differential

EIR Lower Rate + Differential

 3% + .6231
3.6231%

PV at 3.6231% for 5 periods

4.4994

Proof:
Periodic Payment 100,000
x PVF 4.4994
Present Value 449940 VS Present Value 450,000

60 Difference due to rounding off

2021 2022 2023 2024

10,129.30 6,873.19 3,422.00
13,271.56 10,129.30 6,873.19 3,422.00

100,000 100,000 100,000

100,000 100,000 100,000 100,000

ket rate of interest for this type of note is 10%.

or since interest payment is equal every year

PV of interest = 20,000 x PVF of ANNUITY OF 1 AT 10% FOR 5 PERIODS
= 20,000 X 3.7908
= 75,816
PV of Principal = 500,000 x PV of 1 at 10% for 5 periods
= 500,000 x 0.6209
= 310,450
= PV of interest + PV of Principal
75,816
310,450
386,266

20,000
20,000

18,626
18,626
``

Prevailing market rate of interest for this type of

Interest Received Computation

Based on Outstanding Balance of N/R

500,000 4% 20,000
400,000 4% 16,000
300,000 4% 12,000
200,000 4% 8,000
100,000 4% 4,000