NOTES RECEIVABLE – QUIZ

1. Basically speaking, all note receivables are measured initially at

a. Face amount
b. Present value
c. Future value
d. Net realizable value
2. When a note is accepted to settle an open account, note receivables is debited for the note’s
a. Net realizable value
b. Maturity Value
c. Face Value
d. Face value plus interest
3. What present value factors always resulted in a higher amount of present value?
a. Present value of 1
b. Present value of ordinary annuity of 1
c. Present value of annuity due
d. Future value of ordinary annuity of 1
4. If ABC Co. enters the transaction on December 31, 20x3 and the first installment is paid on December 31, 20x3, what will be
the present value factor to be used?
a. Present value of 1
b. Present value of ordinary annuity of 1
c. Present value of annuity due
d. Future value of ordinary annuity of 1
5. 9. If the contractual cash flow from a debt instrument is due in lump sum, the appropriate present value factor to be used is
a. PV of ₱1
b. PV of an annuity due of ₱1
c. PV of an ordinary annuity of ₱1
d. Pass and double it to the next person
6. Accounting for the interest in a noninterest bearing note receivable is an example of what accounting concept?
a. Matching principle of accounting
b. Verifiability
c. Legal form over substance
d. Substance over legal form
7. If present value of an instrument is “PV”, future cash flows is “FCF”, and present value factor is “PVF”, then future cash flows
may be computed as
a. FCF = PVF + PV
b. FCF = PVF ÷ PV
c. FCF = PVF x PV
d. FCF = PV ÷ PVF
8. If the present value of an instrument is lower than the face value of the same instrument
a. The effective interest rate is higher than the stated interest rate
b. The effective interest rate is lower than the stated interest rate
c. The effective interest rate is equal to the stated interest rate
d. None of the above
9. On July 1, 2023, a company obtained a two-year 8% note receivable for services rendered. At that time the market rate of
interest was 10%. The face amount of the note and the entire amount of the interest are due on June 30, 2025. Interest
receivable at December 31, 2023, was
a. 5% of the face value of the note.
b. 4% of the face value of the note.
c. 5% of the July 1,2023, present value of the amount due June 30, 2025.
d. 4% of the July 1,2023, present value of the amount due June 30, 2012
e. None of the above
10. Choose the correct statements:
I. Interest receivable is computed by multiplying the carrying amount of a note by the yield rate.
II. An effective interest rate is used when computing for future cash flows.
III. Interest income is computed by multiplying the carrying amount of a note by the coupon rate.
IV. Total interest income is equal to the sum of unearned interest income on initial recognition and subsequent cash
collections for interest.
a. Statement I and III
b. Statement II only
 c. Statements II and IV only
d. Statement IV only
11. Which of the following is true regarding non-interest bearing note receivables?
a. they include a specified principal amount but an unspecified interest amount
b. they include a specified principal and specified interest
c. they cause no interest income to be recognized over their term
d. they include an unspecified principal and an unspecified interest
12. On March 1, 20x1, ABC Co. received a 12% note dated January 1, 20x1. Principal and interest on the note are due on July 1,
20x1. On initial recognition, which of the following amounts increased?
a. Prepaid interest
b. Interest receivable
c. Unearned interest income
d. Interest revenue
13. ABC Co. obtained a 5-year, P500,000, non-interest-bearing note that requires annual year-end installment payments. ABC Co.
determined that the effective interest rate on the note is 12%. Which of the following statements is correct?
a. ABC Co. will most likely measure the note on initial recognition by dividing the P500,000 by PV of OA of 1 @12%, n=5.
b. ABC Co. will most likely measure the note on initial recognition by multiplying the P500,000 by PV of 1 @12%, n=5.
c. ABC Co. will most likely measure the note on initial recognition by multiplying the P100,000 by PV OA of 1 @12%,
n=5.
d. ABC Co. will most likely measure the note on initial recognition by multiplying the P100,000 by PV AD @12%, n=5.
14. ABC Co. receives a 10-year, P1 million non-interest-bearing note that matures in 5 equal annual year-end installments starting
in the 6th year. The effective interest rate is 12%. Which of the following statements is correct?
a. No interest income shall be recognized during the deferral period of the notes.
b. The amortized cost of the note increases each year for the 1st 5 years and decreases in the last 5 years.
c. The amortized cost of the note increases each year.
d. None of the above statements is correct.
15. At the beginning of 2023, Surreal Company received a three-year zero-interest-bearing P100,000 trade note. The market rate
for equivalent notes was 8% at that time. Surreal City reported this note as a P100,000 trade note receivable on its 2023
year-end statement of financial position and P100,000 as sales revenue for 2023. What effect did this accounting for the note
have on Surreal City’s net earnings for 2023, 2024, 2025, respectively?
a. Overstate, overstate, understate.
b. Overstate, understate, no effect.
c. Overstate, overstate, overstate.
d. Overstate, understate, understate.
16. Choose the incorrect statements regarding amortization of a Deferred Annuity.
I. During periods where no collections were made, the amortization is added to the present value.
II. No Interest income is recognized on the deferred period.
III. The deferral period is ignored in the computation of Present Value Factors for deferred annuity.
a. Statement I Only
b. Statement II and III only
c. Statements II
d. Statement I and II only

17. On December 31, 20x3, ABC Co. sold a building, receiving a consideration of P4,000,000 non-interest-bearing note due in
four years, The building had a cost of P3.8 million and accumulated depreciation of P1.6 million at the date of sale. The
prevailing rate of interest for a note of this type is 8%. In 20x3 income statement, what amount of gain should be reported on
sale?
a. P755,000
b. P760,020
c. P740,120
d. P738,520

10-12. On December 31, 20x1, ABC Co. sold goods to XYZ Co. The goods sold are usual and ordinary sold by ABC Co. XYZ Co.
signed a non-interest-bearing note requiring payment of P600,000 annually for seven years starting January 1, 20x2. The
prevailing market rate is 10%.
18. What is the carrying amount of the note receivable on January 1, 20x2?
a. P2,155,264
b. P2,921,051
c. P3,213,156
d. P2,613,156
19. What is the interest income recognized in December 20x3?
 a. P227,447
b. P261,316
c. P237,079
d. P293,447
20. What amount is presented as the carrying amount of the note receivable in December 20x5 financial statements?
a. P1,041,321
b. P149,211
c. P1,641,321
d. P892,111
21. On January 1, 20x3, ABC Co. sold machinery with a historical cost of P5,000,000 and accumulated depreciation of
P1,900,000 in exchange for 3-year, 3% P3,000,000 note receivable. Principal and interest is due annually every December 31.
The prevailing interest rate for this type of note is 12%.
Evaluate which of the following statements are correct.
I. The initial carrying amount on January 1, 20x3 is P2,551,447.
II. The total interest income to be recognized throughout the life of the note equals P628,553.
III. The carrying amount of the note at December 31, 20x4 equals P919,735.
IV. The entry to record the transaction at January 1, 20x3 involves a debit to Notes receivable amounting to P3,000,000.
a. Statement I only
b. Statements I and III only
c. Statements I, II, III only
d. All the statements are correct.
22. The current and non-current portions of ABC Co. non interest-bearing note receivable on December 31, 20x1 are P68,301 and
P614,712, respectively. The note is dated January 1, 20x1 and is due in on December 31, 20x5. ABC Co. reported interest
income of P62,092 in 20x1. How much is the face amount of the note receivable received by ABC Co?
a. P1,000,000
b. P1,100,000
c. P1,200,000
d. P1,300,000
23. ABC Co. received a P500,000, 9%, 5-year note that requires five equal annual year-end installments. The effective interest
rate of the note is 10%. Compute for the total amount of future cash flows and the total interest revenue to be earned over the
term of the note?
a. P589,664; P97,899
b. P589,664; P215,832
c. P642,730; P155,440
d. P642,730; P183,986
24- 25 On January 1, 2021, Strawberry Co. received a P 2,400,000 noninterest-bearing note from a customer due as follows:
January 1, 2024 P800,000
January 1, 2025 P800,000
January 1, 2026 P800,000
The effective interest rate is 12%
24. How much is the carrying amount of the note on January 1, 2022?
a. P1,715,594
b. P1,531,780
c. P1,921,465
d. P1,352,000

25. How much is the interest income recognized on December 31, 2024?
a. P 183,814
b. P 230,576
c. P162,245
d. P 87,714

PV of Ordinary annuity @12% n=5 3.60477620228

PV of Ordinary annuity @12% n=2 (1.69005102039)
PV of Deferred annuity 1.91472518189
X P 800,000
P 1,531,780
 Date Collection Interest Income Present Value
1/1/21 P 1,531,780
1/1/22 183,814 1,715,594
1/1/23 205,871 1,921,465
1/1/24 P 800,000 230,576 1,352,041
1/1/25 P 800,000 162,245 714,286
1/1/26 P 800,000 85,714 0

26-30 On January 1, 2024, Hybe Company sold an equipment costing P15,000,000 and accumulated depreciation of P5,000,000.
Hybe received a P2,000,000 cash and a 8%, 3-year, P9,000,000 note receivable due every December 31 in three unequal
installment as follows:
December 31, 2024 P 4,500,000
December 31, 2025 3,500,000
December 31, 2026 1,000,000
Interest will be also due annually starting December 31, 2024. Interest effective on this note when received is at 10%. Round
off PV factors to 2 decimal places.

26. How much is the gain/(loss) that should be recognized in profit or loss on January 1, 2024?
a. P (763,000)
b. P 763,000
c. P 1,250,000
d. P (1,250,000)
27. How much is the initial recognition of the Notes Receivable?
a. P 8,763,000
b. P 9,027,000
c. P 7, 110,000
d. P 6,750,000
28. How much is the balance of unearned interest as of December 31, 2024
a. P 75,700
b. P 60,200
c. P 93,200
d. P 80,700
29. How much is the carrying value of notes receivable as of December 31, 2025?
a. P 764,450
b. P 901,450
c. P 1,001,230
d. P 843,230

30. How much is the interest income for the year ended December 31, 2026?
a. P 441,930
b. P 876,300
c. P 100,123
d. P 237,000

DATE Collection on Collection on Total Annual PV of 1 @ PV Factors Present Value

Principal Interest Collection 10%

12/31/24 P4,500,000 9Mx8%=720,000 P5,220,000 n=1 0.91 4,750,000

12/31/25 3,500,000 4.5Mx8%=360,000 3,860,000 n=2 0.83 3,203,800

12/31/26 1,000,000 1Mx8% = 80,000 1,080,000 n=3 0.75 810,000

8,763,800
 Total Consideration Received (8,763,000 + 2,000,000) P10,763,000
CA of Equipment 10,000,000
Gain on sale of equipment P763,000,00

Cash Collections Interest Income Unearned Interest Amortization PV of Notes

Receivable
Jan 01, 2024 237,000 8,763,000
December 31, 2024 5,220,000 876,300 80,700 4,343,700 4,419,300
December 31, 2025 3,860,000 441,930 -1,230 (due to 3,418,070 1,001,230
rounding off)
December 31, 2026 1,080,000 100,123 0 1,001,230 21,353(due to
rounding off)