Centro Escolar University

Manila, Malolos and Makati Campus

Accounting for Loans

Problem 1
On January 1, 2021, Mabuhay Company loaned P3,000,000 to Sana All Incorporated at 10% annual
interest. The loan is due after four (4) years. Mabuhay Company incurred direct origination cost of
P120,000 and Sana All paid direct origination fee of P213,273. Interest effective after considering direct
cost and fees is at 11%.

1. What is the initial amortized cost of the Loan on January 1, 2021? 2,906,727
2. How much is the interest income recognized in its 2021 income statement? 319,740
3. What is the carrying value of the loan on December 31, 2021? 2,926,467
4. What is the carrying value of the loan on December 31, 2022? 2,948,378

Problem 2
On February 1, 2021, Azure Company loaned P10,000,000 to Black Company. The loan is to repayable
after 2 years. Interest on this loan is 2% annually and a direct origination cost of 1% of the total loaned
amount is paid by Azure and direct origination fee was deducted to the proceeds received by Black
Company. The interest effective on this loan is 3.5%.

1. How much is the direct origination fee? 384,954

2. What is the initial amortized cost of the loans? 9,715,046
3. How much is the interest income recognized in its 2021 income statement? 340,027
4. What is the carrying value of the loan on December 31, 2021? 9,855,073
5. What is the carrying value of the loan on December 31, 2022? 0

Problem 3
Details for one of the loan of Contour Company that is probably impaired during the period is as follows:
a. The company made a loan of P100,000,000 to a customer with similar credit risk to Contour
Company on January 1, 2020.
b. Interest is receivable on this loan at the end of each year at 4.5% per annum for the next ten
years.
c. The loan was properly recorded and classified as amortized cost.
d. The company made and initial assessment of the loan and the total expected credit losses over
the life of the loan was P15,000,000. The discount rate applicable was at 3%.
e. On January 1, 2020, the probability of default over the next 12 months was 10%.

On December 31, 2020, there was no indication of impairment nor increase in credit risk. At December
31, 2021, there was a significant increase in the credit risk on the loan made by Contour Company, the
expert assessed that the total expected credit losses over the life of the loan was increase to
P30,000,000. The discount rate applicable was at 3%.

On December 31, 2022, it became clear that the customer was in serious financial difficulties and the
directors of Contour believed that there was an objective evidence of impairment. The total expected
credit losses over the life of the loan was on this date was at P50,000,000. The discount rate applicable
was at 3%.

1. What is the initial amortized cost of the loans on January 1, 2020? 98,883,859
2. What is the amount of impairment loss shall Contour recognized on January 1, 2020?
3. How much is the interest income reported in 2020 Statement of comprehensive income?
4. What is the amount of loan receivable is presented in 2020 statement of financial position?
5. What amount of impairment loss shall Contour recognized on December 31, 2021?
6. How much is the interest income reported in 2020 Statement of comprehensive income?
7. What is the amount of loan receivable is presented in 2020 statement of financial position?

*** end of Handout ***

1. P98,883,859
2. P1,116,141
3. P4,500,000
4. P98,850,375
5. P22,498,163
6. P4,500,000
7. P76,317,723
 Centro Escolar University
Manila, Malolos and Makati Campus
Financial Accounting and Reporting

by: Dr. Jonathan P. Binaluyo, CPA

badyangpogi

Accounting for Notes Receivable

Nature of note receivable

A note receivable is a financial asset arising either from sale of goods or services (trade note receivable)
or from peripheral transaction (non-trade note receivable) or both, on account. A note receivable is
evidence by a written promise to pay amount in the future which is typically the principal amount and
interest. The note receivable may either be an interest-bearing note or a non-interest-bearing note.

A note receivable is said to be interest bearing when a specific interest rate is stated in the promissory
note. The stated rate is the nominal or face rate or coupon rate or contracted rate as part of the note
which usually corresponds to the market rate of interest of similar risk. The market interest rate or
effective interest rate or yield rate is the rate used in the market to determine the value of the note,
which is actually the discount rate to determine present value. When the stated and market rates are
equal it means the notes were selling at face but when the stated and market rates are different it
means that the face of the note is differs from the present value of the note. The difference would either
be a discount or premium that is to be amortized over the term of the note using the effective interest
method as prescribed by the standard for financial instruments.

A note is said to be non-interest-bearing when there is no specific stated interest rate. The interest
rate is already imbedded in the face of the note and consequently the maturity value of a note is its
face amount, therefore, it is necessary to separate the interest from the note by discounting the note
using the prevailing market interest rate.

To remember:
1. Interest bearing – the amount of principal and interest to be paid are both known. The amount of
principal is amount stated on the face of the promissory note while the amount of interest to be paid
is based on the stated interest rate on face of the promissory note. Hence, the total payment on
maturity (which is also known as maturity value) is the computed as follows:

Face value (Principal) Pxx

Interest (Principal x nominal rate x time) xx
Maturity value Pxx

2. Non-interest-bearing – the amount of principal and interest to be paid are both unknown. Meaning
the face value is also equals to maturity value.

Face value (Principal) = Maturity Value

3. An interest-bearing note “may” have an accrued interest receivable if the interest at year end was
earned but not yet received. However, for a non-interest-bearing note, no accrued interest can be
recorded at year end.

Note Receivable issued at market rate of interest

If the note received was issued at market rate of interest, it means that the nominal rate is equal to
effective rate of interest hence, no resulting discount or premium is recognized and no amortization
shall be done on the note. Interest income is recognized based on its nominal interest.

Note Receivable issued other than market rate of interest

If the note received was issued other than market rate of interest, it means that the nominal interest is
not equal to effective rate of interest, hence, it will result in a discount or premium.

If the nominal rate is less than effective rate discount shall be recognized.
Note receivable (face value) xx
Discount on note receivable xx
Sales xx

The present value of note is less than the face value of note when the note was issued at a discount.
The discount shall be amortized every “period”. The amortization of discount is added to previous
carrying value to arrive at notes new carrying value.
Example – Interest Bearing:
On January 1, 2021, Badyang Company received a note in exchange for a piece of land. The 5%, 3 –
year note receivable had face value of P1,000,000. Interest on the note is collectible every December
31 of each year. The land’s carrying value on date of exchange was P650,000. Interest effective when
note was received was at 8%.

The notes initial carrying value is the present value (PV) of cash flows for three periods:
PV of principal (1M x 1.08^-3) P793,832
PV of interest (1M x 5% x 2.577097) 128,855
Total PV of note on 1/1/2021 922,687

The discount on note receivable is the difference of the notes face value and initial carrying value.
Face value of note P1,000,000
Total PV of note on 1/1/2021 (922,687)
Discount on note receivable 77,313

In this example, a gain on exchange is recognized since the PV of the note is higher than the carrying
of the land.

Total PV of note on 1/1/2021 P922,687

Carrying value of land (650,000)
Gain on exchange 272,687

The journal entry on January 1, 2021 is:

Note receivable (face value) 1,000,000
Discount on note receivable 77,313
Land 650,000
Gain on exchange of land 272,687

An amortization table is prepared to amortized the discount and compute the new carrying value of the
note.

Date NI (5%) EI (8%) Amortization CV

1/1/21 P922,687
12/31/21 50,000 73,815 23,815 946,502
12/31/22 50,000 75,720 25,720 972,222
12/31/23 50,000 77,778 27,778 1,000,000

*the nominal interest (NI) is the P1,000,000 x 5% = 50,000

**the effective interest (EI) is the CV of 922,687 x 8% = 73,815
*** the difference of NI and EI is the amortization of discount (73,815 – 50,000) = 23,815
****the amortization of discount is added to the previous carrying value to compute the carrying value
as of December 31, 2021. That is, 922,687 + 23,815 = 946,502
***** interest income is always recorded at effective interest (in 2021 – 73,815; 2022 – 75,720 etc.)

Journal entry at December 31 are as follows:

Cash 50,000
Discount on note receivable 23,815
Interest income 73,815

The carrying value of the note at December 31, 2021 of P946,502 is reported as non-current asset
because is it due for more than 12 months after the reporting period. However, the carrying value of
the note at December 31, 2022 of P972,222 is reported as current asset because is it due within 12
months after the reporting period.

If the nominal rate is more than effective rate premium shall be recognized.
Note receivable (face value) xx
Premium on note receivable xx
Sales xx
The present value of note is more than the face value of note when the note was issued at a premium.
The premium shall be amortized every “period”. The amortization of premium is deducted to previous
carrying value to arrive at notes new carrying value.

Example – Interest Bearing:

On January 1, 2021, Badyang Company received a note in exchange for a piece of land. The 8%, 3 –
year note receivable had face value of P1,000,000. Interest on the note is collectible every December
31 of each year. The land’s carrying value on date of exchange was P650,000. Interest effective when
note was received was at 5%.

The notes initial carrying value is the present value (PV) of cash flows for three periods:
PV of principal (1M x 1.05^-3) P863,838
PV of interest (1M x 8% x 2.723248) 217,860
Total PV of note on 1/1/2021 P1,081,698

The premium on note receivable is the difference of the notes face value and initial carrying value.
Total PV of note on 1/1/2021 P1,081,698
Face value of note (1,000,000)
Premium on note receivable P81,698

In this example, a gain on exchange is recognized since the PV of the note is higher than the carrying
of the land.
Total PV of note on 1/1/2021 P1,081,698
Carrying value of land (650,000)
Gain on exchange P431,698

The journal entry on January 1, 2021 is:

Note receivable (face value) 1,000,000
Premium on note receivable 81,698
Land 650,000
Gain on exchange of land 431,698

An amortization table is prepared to amortized the premium and compute the new carrying value of the
note.
Date NI (8%) EI (5%) Amortization CV
1/1/21 1,081,698
12/31/21 80,000 54,085 25,915 1,055,782
12/31/22 80,000 52,789 27,211 1,028,572
12/31/23 80,000 51,429 28,571 1,000,000

*the nominal interest (NI) is the P1,000,000 x 8% = 80,000

**the effective interest (EI) is the CV of P1,081,698 x 5% = 54,085
*** the difference of NI and EI is the amortization of premium (80,000 – 54,085) = 25,915
****the amortization of premium is deducted to the previous carrying value to compute the carrying
value as of December 31, 2021. That is, 1,081,698 – 25,915 = P1,055,782
***** interest income is always recorded at effective interest (in 2021 – 54,085; 2022 – 52,789 etc.)

Journal entry at December 31 are as follows:

Cash 80,000
Premium on note receivable 25,915
Interest income 54,085

The carrying value of the note at December 31, 2021 of P1,055,782 is reported as non-current asset
because is it due for more than 12 months after the reporting period. However, the carrying value of
the note at December 31, 2022 of P1,028,572 is reported as current asset because is it due within 12
months after the reporting period.

Example – Non-Interest Bearing:

On January 1, 2021, Badyang Company received a note in exchange for a piece of land. The 3 – year
note receivable had face value of P1,000,000. The land’s carrying value on date of exchange was
P650,000. Interest effective when note was received was at 5%.
The notes initial carrying value is the present value (PV) of cash flows for three periods:
PV of principal (1M x 1.05^-3) P863,838

The discount on note receivable is the difference of the notes face value and initial carrying value.
Face value of note P1,000,000
Total PV of note on 1/1/2021 (863,838)
Discount on note receivable P136,162

In this example, a gain on exchange is recognized since the PV of the note is higher than the carrying
of the land.
Total PV of note on 1/1/2021 P863,838
Carrying value of land (650,000)
Gain on exchange P213,838

The journal entry on January 1, 2021 is:

Note receivable (face value) 1,000,000
Discount on note receivable 136,162
Land 650,000
Gain on exchange of land 213,838

An amortization table is prepared to amortized the discount and compute the new carrying value of the
note.
Date EI (5%) CV
1/1/21 863,838
12/31/21 43,192 907,029
12/31/22 45,351 952,381
12/31/23 47,619 1,000,000

*the effective interest (EI) is the CV of P863,838 x 5% = 43,192

**the amortization of discount is added to the previous carrying value to compute the carrying value as
of December 31, 2021. That is, P863,838 + 43,192 = P907,029
*** interest income is always recorded at effective interest (in 2021 – 43,192; 2022 – 45,351 etc.)

Journal entry at December 31 are as follows:

Discount on note receivable 43,192
Interest income 43,192

The carrying value of the note at December 31, 2021 of P907,029 is reported as non-current asset
because is it due for more than 12 months after the reporting period. However, the carrying value of
the note at December 31, 2022 of P952,381 is reported as current asset because is it due within 12
months after the reporting period.

Note receivable issued at interim date

Example – Interest Bearing:

On April 1, 2021, Badyang Company received a note in exchange for a piece of land. The 8%, 3 – year
note receivable had face value of P1,000,000. Interest on the note is collectible every April 1 of each
year starting 2022. The land’s carrying value on date of exchange was P650,000. Interest effective
when note was received was at 5%.

The notes initial carrying value is the present value (PV) of cash flows for three periods:
PV of principal (1M x 1.05^-3) P863,838
PV of interest (1M x 8% x 2.723248) 217,860
Total PV of note on 4/1/2021 P1,081,698

The premium on note receivable is the difference of the notes face value and initial carrying value.
Total PV of note on 4/1/2021 P1,081,698
Face value of note (1,000,000)
Premium on note receivable P81,698
In this example, a gain on exchange is recognized since the PV of the note is higher than the carrying
of the land.
Total PV of note on 4/1/2021 P1,081,698
Carrying value of land (650,000)
Gain on exchange P431,698

The journal entry on April 1, 2021 is:

Note receivable (face value) 1,000,000
Premium on note receivable 81,698
Land 650,000
Gain on exchange of land 431,698

An amortization table is prepared to amortized the premium and compute the new carrying value.
Date NI (8%) EI (5%) Amortization CV
4/1/21 1,081,698
12/31/21 60,000 40,564 19,436 1,062,261
4/1/22 20,000 13,521 6,479 1,055,782
12/31/22 60,000 39,592 20,408 1,035,374
4/1/23 20,000 13,197 6,803 1,028,572
12/31/23 60,000 38,571 21,429 1,007,143
4/1/24 20,000 12,857 7,143 1,000,000

*the interest income for year 2021 is the income earned from April 1 – December 31 (9 months) only
which is 40,564 (1,081,698 x 5% x 9/12) = P40,564.
*the interest income for year 2022 is the income earned from January 1 – December 31 (12 months)
which is 13,521 (1,081,698 x 5% x 3/12) + 39,592 (1,055,782 x 5% x 9/12) = P53,113
**remember that interest income from 12 months (Apr 1, 2021 – March 31, 2022) is based on carrying
value as of April 1, 2021 which is P1,081,698.

Journal entry on December 31, 2021 to accrue the interest and recognized interest income:
Interest receivable 60,000
Premium on note receivable 19,436
Interest income 40,564

Journal entry on April 1, 2022, the receipt of first periodic interest payment is:
Cash 80,000
Premium on note receivable 6,479
Interest income 13,521
Interest receivable 60,000

Journal entry on December 31, 2022 to accrue the interest and recognized interest income:
Interest receivable 60,000
Premium on note receivable 20,408
Interest income 39,592

Total interest income in 2022 based on journal entries is P53,113. That is the interest recorded from
January 1 – April 1, 2022 of P13,521 and from April 1 – December 31, 2022 of P39,592.

The carrying value of the note at December 31, 2021 and 2022 of P1,062,261 and P1,035, 374 are
reported as non-current asset because is it due for more than 12 months after the reporting period.
However, the carrying value of the note at December 31, 2023 of P1,007,143 is reported as current
asset because is it due within 12 months after the reporting period.

Notes receivable collectible in installment

If the note receivable is collectible in installment, the amount of collection every period is composed of
principal and interest payments. At each collection period, the amount of principal decreases by the
amount of collection to principal. The computation of the PV of note is slightly different because the
amount of interest decreases every period.

Example – Interest Bearing (Installment)

On January 1, 2021, Badyang Company received a note in exchange for a piece of land. The 5%, 3 –
year note receivable had face value of P1,500,000. The note is collectible in equal annual payments of
P500,000 plus interest based on outstanding balance every December 31 of each year. The land’s
carrying value on date of exchange was P650,000. Interest effective when note was received was at
8%.

The notes initial carrying value is the present value (PV) of cash flows for three periods:
Collection to
Date Principal Interest (5%) Total PV factor PV
12/31/21 500,000 75,000 575,000 1.08^-1 P532,407
12/31/22 500,000 50,000 550,000 1.08^-2 471,536
12/31/23 500,000 25,000 525,000 1.08^-3 416,762
Total P1,420,706
*since the principal was reduced by P500,000 each year the outstanding balance also decreases,
hence, the interest.
2021 – 1,500,000 x 5% = 75,000
2022 – 1,000,000 x 5% = 50,000
2023 – 500,000 x 5% = 25,000

The discount on note receivable is the difference of the notes face value and initial carrying value.
Face value of note P1,500,000
Total PV of note on 1/1/2021 (1,420,706)
Discount on note receivable P79,294

In this example, a gain on exchange is recognized since the PV of the note is higher than the carrying
of the land.
Total PV of note on 1/1/2021 P1,420,706
Carrying value of land (650,000)
Gain on exchange P770,706

The journal entry on January 1, 2021 is:

Note receivable (face value) 1,500,000
Discount on note receivable 79,294
Land 650,000
Gain on exchange of land 770,706

An amortization table is prepared to amortized the discount and compute the new carrying value:
Date Principal NI (5%) EI (8%) Amortization CV
1/1/21 1,420,706
12/31/21 500,000 75,000 113,656 38,656 959,362
12/31/22 500,000 50,000 76,749 26,749 486,111
12/31/23 500,000 25,000 38,889 13,889 (0)

*the nominal interest for each year is as follows:

2021 – 1,500,000 x 5% = 75,000
2022 – 1,000,000 x 5% = 50,000
2023 – 500,000 x 5% = 25,000
**the effective interest (EI) is the CV of P1,420,706 x 8% = 113,656
*** the difference of NI and EI is the amortization of discount (113,656 – 75,000) = 38,656
****the amortization of discount is added to the previous carrying value while the payment to principal
of P500,000 is deducted to compute the carrying value as of December 31, 2021. That is, P1,420,706
+ 38,656 – 500,000 = P959,362. DO NOT FORGET TO DEDUCT THE PAYMENT TO PRINCIPAL TO
ARIVE AT NEW CV.
***** interest income is always recorded at effective interest (in 2021 – 113,656; 2022 – 76,749 etc.)

Journal entry at December 31, 2021 is as follows:

Cash 575,000
Discount on note receivable 38,656
Interest income 113,656
Note receivable 500,000
*total cash received is the sum of principal and interest.
Journal entry at December 31, 2022 is as follows:
Cash 550,000
Discount on note receivable 26,749
Interest income 76,749
Note receivable 500,000
*total cash received is the sum of principal and interest.

The carrying value of the note at December 31, 2021 of P959,362 is reported as current and non-
current asset because portion of it is it due for more than 12 months after the reporting period and
another portion is it due within 12 months after the reporting period. The non -current portion is the CV
of the note next year (12/31/22) which is P486,111, therefore, the difference of P959,362 – 486,111 =
473,251 is the current portion.

Alternatively, the amount due within 12 months is the P500,000 due on 12/31/2022 with amortization
of P26,749. The difference of the principal due and amortization is the PV of currently due (500,000 –
26,749) = 473,251. While the portion due beyond 12 months is another P500,000 due on December
31, 2023. The difference of the principal due and amortization is the PV of not currently due (500,000
– 13,889) = 486,111.

Discounting Notes Receivable

A holder of a note can readily convert it to cash by discounting it at a bank, either with or without
recourse. The bank accepts the note and gives the holder cash equal to its maturity value less a
discount computed by a discount rate to the maturity value. The bank gets its money back plus the
discount when the note is paid by its maker at maturity. If the note is not paid at maturity, the bank can
collect from the original holder if it was discounted with recourse. If the arrangement is without recourse,
the bank must find another remedy.

For notes discounted with recourse, the original holder is contingently liable for paying the note. That
is, it will have to pay the note if it is defaulted. This type of liability is not disclosed in the balance sheet
but should be described in a footnote if it is material.

A five-step process is used in accounting for a discount on notes receivable:

1. Compute the maturity value.

2. Compute the discount (discount rate times maturity value).
3. Compute the proceeds (maturity value less discount).
4. Compute the net interest income or expense (proceeds less carrying value).
5. Prepare the journal entry.

Example: Discounting of Note receivable with recourse (treated as borrowing)

On May 1, 2021, Hong Dae Yong Company discounted a P100,000, 6-month, 5% note originally dated
January 1, 2021 due on June 30, 2021. The bank discount rate is 10%.

The maturity value is computed as follows:

Face Value P100,000
Total interest (100,000 x 5% x 6/12) 2,500
Maturity Value P102,500

The proceeds on discounting is as follows:

Maturity Value 102,500
Discount (102,500 x 10% x 2/12) (1,708)
Proceeds 100,792
The amount of discount is the maturity value times the discount rate time the period forgo. (2 months)

On date of discounting, the interest earned is accrued:

Interest receivable 1,667
Interest income 1,667
(100,000 x 5% x 4/12) = 1,667

The entry to record the proceeds and discounting is:

Cash 100,792
Liability on discounted note 100,792
Since this is with recourse, a liability is recognized and no derecognition of note receivable.
At maturity date, the collection of the note and the payment to bank is recorded as follows:
Cash 102,500
Note receivable 100,000
Interest receivable 1,667
Interest income 833

Liability on discounted note 100,792

Interest expense (discount) 1,708
Cash 102,500

The entire amount collected (maturity value) will be remitted to the bank, and the discount (P1,708) is
recognized as finance cost. Since if note was discounted on with recourse it is treated as a borrowing.

Example: Discounting of Note receivable without recourse (treated as sale)

On May 1, 2021, Hong Dae Yong Company discounted a P100,000, 6-month, 5% note originally dated
January 1, 2021 due on June 30, 2021. The bank discount rate is 10%.
The maturity value is computed as follows:
Face Value P100,000
Total interest (100,000 x 5% x 6/12) 2,500
Maturity Value P102,500

The proceeds on discounting is as follows:

Maturity Value 102,500
Discount (102,500 x 10% x 2/12) (1,708)
Proceeds 100,792
The amount of discount is the maturity value times the discount rate time the period forgo. (2 months)

On date of discounting, the interest earned is accrued:

Interest receivable 1,667
Interest income 1,667
(100,000 x 5% x 4/12) = 1,667

The entry to record the proceeds and discounting is:

Cash 100,792
Loss on discounting 875
Interest receivable 1,667
Notes receivable 100,000

Since it is treated as sale, a loss on discounting is recognized. The company does not have any right
on the note after the sale. The right to collect the note is transferred to the bank.

Multiple Choices. Theories:

1. A non-interest-bearing note receivable:

A. Cause no interest revenue to be recorded.
B. Includes a specified principal amount plus specified interest
C. Includes a specified principal amount but an unspecified interest
D. Includes an unspecified principal amount and unspecified interest

2. 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. No interest receivable
B. A deferred credit for interest applicable to next year
C. Interest receivable for the interest accruing this year
D. Interest receivable for the entire amount of the interest due on June 30 of next year

3. The amortization of discount on note receivable will:

A. Increase the amount of interest income.
B. Decrease the amount of interest income.
C. Decrease the carrying value of the note receivable.
D. Increase the face value of the note receivable.
4. If the note has a nominal interest of 10% and was issued at a market rate of interest of 12%, the
note:
A. was issued at market rate of interest.
B. was issued resulting to a discount.
C. was issued resulting to a premium.
D. was a non-interest bearing note.

5. How would the interest-bearing note collectible in installment shall be reported in the statement of
financial position?
A. the entire carrying value is always reported as non-current asset.
B. the carrying value maybe reported as partly current and partly non-current.
C. the entire carrying value is always reported as current asset.
D. the carrying value is not reported in the statement of financial position.

6. The interest on a non interest bearing note is equal

A. The excess of the face value over the present value
B. The excess of the present value of over the face value
C. The excess of the market value over the present value
D. Zero

7. Ding Belle Inc. received a three-year, non-interest bearing note for P50,000 on January 1, 2020.
The current interest rate at that time was 15% for similar notes. Ding Belle recorded the receipt of
the note as follows:
Notes Receivable 50,000
Sales 50,000
The effect of this accounting for note receivable on Ding Belle’s profit for the years 2020, 2021 and
2022 and its retained earnings at the end of 2022, respectively shall be
A. overstate, overstate, understate, no effect
B. overstate, understate, understate, understate
C. overstate, understate, understate, no effect
D. no effect on any of these

8. The proceeds on discounting notes receivable is:

A. Reduced by the amount of interest up to maturity value.
B. Reduced by the amount of discount
C. Increased by the total interest earned by the company
D. Increased by any protest fee

9. Statement 1: When a notes receivable is discounted on a with recourse basis, the transaction is
treated as borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes
receivable is always equals to the amount of discount.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false

Problem Solving.

Problem 1
On January 1, 2021, U-Yeoung Company received a P100,000 cash and P2,500,000, 10%, note
receivable after 5 years. The note was received from sale of an old equipment with original cost of
P3,000,000 and accumulated depreciation of P1,000,000. Interest effective when the note was received
was at 12%.

1. How much is the discount on notes receivable on January 1, 2021? 180,239 419,761
2. How much is the gain (loss) on sale of equipment should U-Yeoung recognize on January 1, 2021?
3. How much is the interest income reported in 2021 income statement? 278,371
4. How much is the carrying value of the note receivable as of December 31, 2021? 2,348,132
5. How much is the interest income reported in 2022 income statement? 281,776
6. How much is the carrying value of the note receivable as of December 31, 2022? 2,379,908

Problem 2
On January 1, 2020, Joker Company sold an equipment by receiving cash of P2,000,000 and a 10%
4-year notes receivable in equal annual installment of P1,000,000 plus interest based on outstanding
balance of the note at the end of each year. Initially, Joker Company recorded a discount on notes
receivable amounting to P160,442. on December 31, 2021, the amortization of discount on notes
receivable is P48,038. At the end of 2022, the balance of unamortized discount is P17,857.

What is the amount of interest income reported in 2020 income statement? 460,747
What is the amount of interest income reported in 2021 income statement? 348,038
What is the carrying amount of the note receivable reported in the current asset section as of December
31, 2021?
966,199
Problem 3
On March 1, 2021 Si-a Company received a 10%, P600,000 note collectible after 2 years in exchange
of merchandise sold. Interest on the note is collectible every March 1 starting 2022. Interest effective
on this note is 6%.

1. How much is the premium on notes receivable on March 1, 2021? 44,002

2. How much is the interest income reported in 2021 income statement? 32,200
3. How much is the carrying value of the note receivable as of December 31, 2021? 626,202 - NCA
4. How much is the interest income reported in 2022 income statement? 37,573
5. How much is the carrying value of the note receivable as of December 31, 2022? 603,774 - CA

Problem 4 - Comprehensive
Passionate Incorporated’s financial statements for the year 2020 showed the following notes
receivable:
Notes receivable from sale of machinery P400,000
9% Notes Receivable from sale of 2,000,000
furniture

Transactions during 2021 and other information relating to the entity’s note were as follows:
a) On January 1, 2020, the company sold an old machinery receiving P50,000 cash and a non-interest-
bearing note of P400,000 due after four years. The prevailing interest rate for this type of note is
10%.

b) The 9% note is dated October 1, 2020 and is collectible in three equal annual installments of
P1,000,000 plus interest beginning October 1, 2021. The first principal and interest payment were
made on October 1, 2021. The note is received from Arellano Corp. for furniture sold in 2020. The
prevailing market rate of interest when the note was received was at 12%.

c) On January 1, 2021, the company sold various computer equipment for P4,600,000, the company
received a down payment of P600,000 and a non-interest-bearing note to be collected in 4 equal
annual installments of P1,401,061 which includes principal and interest. Interest effective is at 15%
when the note was received.

1. How much is the total interest income in 2021?

2. How much is the total current notes receivable in 2021?
3. How much is the total interest income in 2022?
4. How much is the to current portion of the notes as of December 31, 2022?
5. How much is the total noncurrent portion of the notes as of December 31, 2022?

Problem 5
Roth Company received from a customer a one-year, P500,000 note bearing annual interest of 8%.
After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest
rate of 10%.
1. What amount of cash did Roth receive from the bank? 513,000

Apex Company accepted from a customer P1,000,000 face amount, 6-month, 8% note is dated April
1, 2021. On June 1, 2021 Apex discounted the note at Union Bank at a 10% discount rate.
1. What amount did Apex receive when it discounted the note at 10% on April 1, 2021? 1,005,333
2. What is the journal entry assuming the discounting was made on with recourse basis?
3. What is the journal entry assuming the discounting was made on without recourse basis?

*** end of handout***

 Centro Escolar University
Cavite Campus
Financial Accounting and Reporting
Accounting for Proof of Cash

Multiple Choices – Theories:

1. A proof of cash would be useful for
A. Discovering cash receipts that have not been recorded in the journal.
B. Discovering time lag in making deposits.
C. Discovering cash receipts that have been recorded but have not been deposited.
D. Discovering an inadequate separation of incompatible duties of employee.

2. Which of the following is added in current month book receipts?

A. Previous month’s outstanding checks.
B. Overstatement in recording check disbursement.
C. Collection of the bank in current month’s note receivable.
D. NSF check returned in prior period, recorded and redeposited in the current period.

3. For purposes of preparing proof of cash, debit memos for current period are:
A. added to the bank receipts and deducted to bank disbursement.
B. added to bank disbursements and added to bank ending balance.
C. added to book disbursements and deducted to book ending balance.
D. deducted to book receipts and deducted to book ending balance.

4. Which of the following is a bank disbursement adjusting transaction?

A. Previous month’s outstanding checks.
B. BSC of the current month.
C. Current month’s deposit in transit.
D. Bank error in recording customers deposit, deposit is understated.

5. How is the outstanding check for the previous month is treated in the proof of cash?
A. Added to previous month cash balance and added to current month receipts.
B. Deducted from previous month cash balance and deducted from current month receipts.
C. Deducted from previous month cash balance and deducted from current month disbursements.
D. Added to previous month cash balance and deducted from current month disbursements.

6. In preparing the proof of cash, a bank made an error for a deposit made during the period, the
amount of deposit is P200,000 but it was credited by bank at P220,000. The error was detected and
corrected by the bank in the same period. How would this affect the proof of cash?
A. Add to both receipts and disbursements of P20,000.
B. Add to receipts of P20,000 and add to ending balance of P20,000.
C. Deduct to both receipts and disbursements of P20,000.
D. Deduct to receipts of P20,000 and deduct to ending balance of P20,000.

7. A collection from a customer during the current month for P2,000,000 was debited in the book at
P200,000. This error was discovered and correct in the same month. How would this affect the proof
of cash in the book?
A. P1,8000,000 deducted in disbursements, P1,800,0000 deducted in ending balance.
B. P1,8000,000 deducted in disbursements, P1,800,0000 deducted in receipts.
C. P1,8000,000 added in disbursements, P1,800,0000 added in ending balance.
D. No effect

8. After preparing the proof of cash, the adjusted balances of previous and current months cash
balances are not equal. How would this be interpreted when cash balance per book is higher by
P5,000 than cash balance per bank.
A. Bank balance is correct, no adjustments shall be made.
B. Bank balance is correct, cash shortage is adjusted in book.
C. Book balance is correct, cash overage is adjusted in bank.
D. Book balance is correct, cash overage is adjusted in book.
E. Bank balance is correct, cash overage is adjusted in book.

9. How would the cash collections during the current month used in payment of cash expense on the
same day will be treated in proof of cash?
A. added in bank receipts and bank ending balance.
B. deducted in book receipts and added in book ending balance.
C. added in bank receipts and added in bank disbursements.
D. deducted in book receipts and deducted in book ending balance.
*as if it was deposited and disbursed in the bank; POC purposes - added to bank receipts and
added to bank disbursements
10. An NSF check in current period was returned by bank, it was redeposited in the same period. The
book recorded the return of check as a reduction in cash receipts while the redeposit is recorded as
cash receipts. How would this be treated in proof of cash.
A. no adjustment.
B. deducted in receipts and added in disbursement.
C. added in receipts and added in disbursements. Book item
D. deducted in disbursement and deducted in receipts.

Part 2. Problem Solving.

Problem 1
The following data are to be used in reconciling the May 31, 2021 bank balance of Magalang Company:
2021
April May
Cash in bank balance - at the end of month P3,561,000 P4,629,720
Bank statement balance - at the end of month 7,403,500 3,862,200
Bank service charges for the month 6,000 6,800
NSF checks 815,000 118,000
Deposits in transit - end of month 950,000 925,400
Note collected by the bank (unrecorded by the
company until the month following collection) 1,500,000 202,000
Outstanding checks end of month 4,463,000 149,680
Checks of Magaling Incorporated charged by
bank to the company’s account in error 349,500 60,000
Check number 6129 erroneously recorded in
the check register at P78,000; the correct
amount is (this check is outstanding on 5/31/21) 87,000
Receipts during the month 42,700,170
Total credits to cash in bank 41,631,450
Total charges on bank statement 45,317,570

1. How much is the adjusted cash balance as of April 30, 2021? 4,240,000
2. How much is the adjusted cash receipts as of May 31, 2021? 41,402,170
3. How much is the adjusted cash disbursement as of May 31, 2021? 40,944,250
4. How much is the adjusted cash balance as of May 31, 2021? 4,697,920

Problem 2
The following data are available for the cash account of Bacolor Company in 2021.

Nov. 30 Dec. 31
Cash per bank statements P803,115 P1,033,627
Deposit in transit 65,100 120,450
Outstanding checks 72,400 66,320
Bank service charges 700 300
Insufficient fund check 12,500 19,600
Company's notes receivable collected by bank 280,310 309,440

The bank statement and the company’s cash records showed the following totals:
Checks and debit memos per bank statement P1,787,798
Cash receipts per cash record ?
Cash disbursements per cash records ?
Deposits and credit memos per bank statement 2,018,310

Additional information:
a. A P45,000 bank credit error in November was corrected by the bank in December, while a P22,000
check issued by Star Very Cheese Corp. was erroneously charge by the bank to the company’s
account in December.
b. A P150,000 customer collection was recorded by the book in December at P155,000 upon
collection, the error was detected and corrected in December.
c. The accountant recorded a receipt in November for P80,000, the correct amount should be P90,000.
The error was detected and corrected in December.
d. The book credited a collection made in December from a customer for P24,600. The correct amount
of collection is P26,400.

1. What is the unadjusted book balance in November? 473,705

2. What is the unadjusted book disbursement in December? 1,737,618
3. What is the unadjusted cash balance per books as of December 31? 769,217
4. What is the adjusted cash balance as of November 30? 750,815
5. What is the adjusted receipt in December 31? 2,073,660
6. What is the adjusted disbursement in December 31? 1,714,718
7. What is the correct cash balance as of December 31? 1,109,757

Problem 3
The cash account of Mango Company, you are required to prepare a four column reconciliation of
receipts, disbursements, and balances using the adjusted balance method and to submit adjusting
journal entries as of September 30, 2021.
August 31 September 30
Balances per bank P14,010 P19,630
Balances per books 13,290 18,195
Deposits in transit 2,740 3,110
Outstanding checks 4,260 3,870 - 700 = 3,170
Bank collections not in books 1,200 1,600
Bank charges not in books 950 640

Additional information;
a. Of the outstanding checks on September 30, one check for P700 was certified at the request of the
payee.
b. Receipts for September, per bank statement, P281,070
c. September disbursements per cash journal, P274,635.
d. NSF* check from customer was charged by the bank on September 28 and has not been recorded,
P800.
e. NSF check returned in August and recorded in September, P1,050.
f. NSF check returned and recorded in September, P900.
g. Check of Yang company charged by the bank in error, P2,010.
h. Receipts on September 6 paid out in cash for travel expenses, P750.
i. Error in recording customer’s check on September 20, P165 instead of P465.
j. Error in disbursements journal for September, P3250 instead of P325.

*The NSF checks returned by the bank are recorded as a reduction in the cash receipts journal instead
of recording them in the cash disbursements journal, redeposit are recorded as regular cash receipts.

1. Adjusted cash receipts as of September. 282,190

2. Adjusted cash disbursement as of September. 273,100
3. Adjusted August 31 cash balance. 12,490
4. Adjusted September 30 cash balance. 21,580

Problem 4
Razon Company’s cash in bank for the fiscal year ended April 30, 2021, you ascertained the following
information:

March 31 April 30
Cash per books P109,125 P?
Cash per bank statements 1,573,835 2,521,790
Deposits in transit 243,510 320,500
Outstanding checks 576,320 526,960
Bank service charges 11,500 7,400
Insufficient fund check 44,270 –
Company's notes receivable collected by bank 256,760 425,300

The bank statement and the company’s cash records show the following totals:
Checks and debit memos per bank statement P3,321,528
Cash receipts per cash record ?
Cash disbursements per cash records ?
Deposits and credit memos per bank statement ?

Additional information:
a. The insufficient fund check was re-deposited in the same month. No entry was made to take up the
return but the re-deposit was recorded as regular cash receipts.
b. A P50,000 bank debit error in March was corrected by the bank in April, while a P124,000 withdrawal
of Reyzon Corporation was erroneously debited by the bank to the company’s account in April.
c. A P34,000 disbursement check was recorded in March as P43,000. The error was discovered and
corrected in April.
d. A P160,000 customer collection was recorded in the book in March for P16,000, the error was
detected in April but no correction was made yet.
e. A customer paid Razon Company thru an online platform with the same bank, which the customer
and Razon Company maintained bank accounts. The customer payment was debited by the bank
in Razon’s account in April for P108,000. The customer forwarded the e-receipt through email with
Razon Company’s collection department. The bank in April acknowledged the payment of the
customer for P108,000, the accountant made an entry in the book upon confirmation of the bank on
April 29 as follows:

Cash 118,000
Accounts receivable 118,000
To record the collection of account from a customer.

1. How much is the unadjusted book receipt in April? 4,254,933

2. How much is the unadjusted book disbursement in April? 3,044,268
3. How much is the unadjusted cash in book as of April? 1,319,790
4. How much is the adjusted cash balance as of April? 2,655,330
5. How much is the adjusted receipts as of April? 4,404,473
6. How much is the adjusted disbursements as of April? 3,040,168
7. How much is the amount of cash shortage (overage) as of April 30, if any? overage - 827,910

Problem 5
Information about Samsung Company’s cash in bank for the year ended December 31, 2020 was
presented below:
Nov. 30 Dec. 31
Cash balance per book P258,600 P420,150
Cash per bank statements 400,500 530,600
Deposit in transit 23,100 20,450
Outstanding checks 13,400 11,320
Bank service charges 300 420
Insufficient fund check 2,500 7,600
Company's notes receivable collected by bank 160,300 109,400

The bank statement and the company’s cash records show the following totals:
Checks and debit memos per bank statement P188,200
Cash receipts per cash record 343,350
Cash disbursements per cash records 181,800
Deposits and credit memos per bank statement 318,300

Additional information:
f. A P5,000 bank debit error in November was corrected by the bank in December, while a P2,000
check collection in December deposited by Samyang Company was erroneously credited by the
bank to the company’s account in December.
g. An P18,000 customer collection was debited in the book for P1,800.
h. The book credited a check payment to a supplier made in November at P5,600. The correct amount
of the check is P6,500. This was corrected in December.

1. What is the adjusted cash balance in November? 415,200

2. How much is the adjusted cash balance in December? 537,730
3. What is the adjusted receipts in December? 308,650
4. What is the adjusted disbursement in December? 186,120