4 – Notes Receivable

Problems with Solutions

The following problems are broken out into two lists: List A comprises of problems I strongly
encourage you to try out as they go to the core of the materials. List B comprises of extra
practice problems. The great majority of students will only work through the List A problems.

List A –

Problems 4-1 and 4-2 (pages 2-5)

Brief Exercises 7.11, 7.12, 7.13

Exercises 7.12, 7.13*
Problems 7.9 (long and arduous, but a really good problem)

* Exercise 7.13: I expanded the solution as follows:

Note 1 – Land. Wrote the journal entries for the duration of the note.
Note 2 – Services. Wrote the journal entries to December 31, 2022.
I assumed that the company’s year end was December 31.

List B –

Brief Exercises 7.9, 7.10,

Exercises 7.11, 7.14
Problems 7.7, 7.8

Problem 4-1

On April 1, 20x3 the Apex Company sold used equipment for proceeds of $500,000 to the
Johnson Company. The terms of payment are as follows:

• $50,000 on April 1, 20x3

• $100,000 on April 1, 20x4
• $150,000 on April 1, 20x5, and
• $200,000 on April 1, 20x6.

Interest of 2% is payable each April 1st based on the loan balance outstanding over the previous
year (i.e. interest of $450,000 x 2% = $9,000 is payable on April 1, 20x4).

The equipment was acquired by the Apex Company on January 1, 20x0 for $700,000, had an
estimated useful life of 10 years and a salvage value of $50,000. The Apex Company uses the
diminishing balance method of depreciation at a rate of 20% and has a December 31 year end.

The Apex Company’s incremental borrowing rate is 8%. Depreciation expense is recorded at the
end of the year only.

Required –

Prepare all journal entries relative to this transaction for the years 20x3 to 20x6.

Problem 4-2

On April 30, 20x5, you sell inventory having a retail value of $500,000 to one of your customers
on the following terms:
• 2% interest paid on the face value of the note at each anniversary date
• the full $500,000 is payable on April 30, 20x8
Had this been a cash sale, you would have sold the inventory for $475,000.

Required –

Prepare all journal entries relative to this transaction for the years 20x5 to 20x8. Your year-end is
December 31.
 3

Problem 4-1

The first step is to calculate the cash flows that will be generated by this note.

April 1, 20x3 - $50,000

April 1, 20x4 - $100,000 + $9,000 of interest = $109,000
April 1, 20x5 - $150,000 + $7,000($350,000 x 2%) of interest = $157,000
April 1, 20x6 - $200,000 + $4,000($200,000 x 2%) of interest = $204,000

The next step is to discount these cash flows at April 1, 20x3 at the incremental borrowing rate
of 8%:

Present
Cash Flow of… Value
April 1, 20x3 $ 50,000
April 1, 20x4 N = 1, I = 8, FV = $109,000 100,926
April 1, 20x5 N = 2, I = 8, FV = $157,000 134,602
April 1, 20x6 N = 3, I = 8, FV = $204,000 161,942
$447,470

The net book value of the equipment sold at December 31, 20x2 is:
$700,000 x 0.803 = $358,400

Depreciation for the period Jan 1, 20x3 to April 1, 20x3 = $358,400 x 20% x 3/12
= $17,920

Net book value of the equipment on April 1, 20x3 = $358,400 – 17,920 = $340,480

Journal Entries -

Apr 1, 20x3 Depreciation expense $17,920

Accumulated Depreciation $17,920

Cash 50,000
Note receivable 397,470
Accumulated depreciation 359,520
Equipment 700,000
Gain on sale of equipment 106,990

Dec 31, 20x3 Interest receivable 23,848

Interest revenue 23,848
$397,470 x 8% x 9/12
 4

Apr 1, 20x4 Cash 109,000

Interest receivable 23,848
Interest revenue ($397,470 x 8% x 3/12) 7,949
Note receivable 77,203

Dec 31, 20x4 Interest receivable 19,216

Interest revenue 19,216
($397,470 - 77,203) = 320,267 x 8% x 9/12

Apr 1, 20x5 Cash 157,000

Interest receivable 19,216
Interest revenue ($320,267 x 8% x 3/12) 6,405
Note receivable 131,379

Dec 31, 20x5 Interest receivable 11,333

Interest revenue 11,333
($320,267 - 131,379) = 188,888 x 8% x 9/12

Apr 1, 20x6 Cash 204,000

Interest receivable 11,333
Interest revenue ($188,888 x 8% x 3/12)* 3,779
Note receivable 188,888

* difference due to rounding

 5

Problem 4-2

Imputed Rate: N = 3, PV = -475,000, PMT = 10,000, FV = 500,000

I/Y = 3.795%

Apr 30, 20x5 Note Receivable 475,000

Revenue 475,000

Dec 31, 20x5 Interest Receivable ($475,000 x 3.795% x 8/12) 12,018

Interest revenue 12,018

Apr 30, 20x6 Cash 10,000

Note receivable 8,027
Interest receivable 12,018
Interest revenue ($475,000 x 3.795% x 4/12) 6,009

Dec 31, 20x6 Interest Receivable ($483,027 x 3.795% x 8/12) 12,221

Interest revenue 12,221

Apr 30, 20x7 Cash 10,000

Note receivable 8,331
Interest receivable 12,221
Interest revenue ($483,027 x 3.795% x 4/12) 6,110

Dec 31, 20x7 Interest Receivable ($491,358 x 3.795% x 8/12) 12,431

Interest revenue 12,431

Apr 30, 20x8 Cash 10,000

Note receivable 8,642
Interest receivable 12,431
Interest revenue ($491,358 x 3.795% x 4/12) 6,211

Cash 500,000
Note receivable 500,000


 6

BRIEF EXERCISE 7.9

a.
Nov 1, 2020 Notes Receivable 20,000
Sales Revenue 20,000

Dec 31, 20x0 Interest Receivable 200

Interest Income ($20,000 x 6% x 2/12) 200

May 1, 2020 Cash 20,600

Notes Receivable 20,000
Interest Receivable 200
Interest Income ($20,000 x 6% x 4/12) 400

b.
Jan 1, 2021 Interest Income 200
Interest Receivable 200

May 1, 2021 Cash 20,600

Notes Receivable 20,000
Interest Income 600

BRIEF EXERCISE 7.10

Notes Receivable 47,573

Cash 47,573

Cash 49,000
Notes Receivable 47,573
Interest Income 1,427
 7

BRIEF EXERCISE 7.11

a.

Notes Receivable 30,053

Cash 30,053

First year -
Notes Receivable 3,005
Interest Income ($30,053 x 10%) 3,005

Second year -
Notes Receivable 3,306
Interest Income ([$30,053 + $3,005] x 10%) 3,306

Third year -
Notes Receivable 3,636
Interest Income ([$30,053 + $3,005 + $3,306] x 10%) 3,636

Collection at maturity -
Cash 40,000
Notes Receivable 40,000

b. N = 3, PV = -30,053, FV = 40,000
CPT I/Y = 10%
 8

BRIEF EXERCISE 7.12

a. PV of note receivable:

N = 3, I = 9, FV = 5,000
CPT PV = $3,861

Notes Receivable 3,861

Accumulated Depreciation – Equipment ($15,000 – 2,500) 12,500
Equipment 15,000
Gain on Disposal of Equipment 1,361

b. First year -
Notes Receivable 347
Interest Income ($3,861 x 9%) 347

Second year -
Notes Receivable 379
Interest Income ([$3,861 + $347] x 9%) 379

Third year -
Notes Receivable 413
Interest Income ([$3,861 + $347 + $379] x 9%) 413

c. Cash 5,000
Notes Receivable 5,000
 9

BRIEF EXERCISE 7.13

a. PV of note receivable:

N = 3, I = 9, FV = 5,000
CPT PV = $3,861

Notes Receivable 3,861

Accumulated Depreciation – Equipment ($15,000 – 2,500) 12,500
Equipment 15,000
Gain on Disposal of Equipment 1,361

b. Notes Receivable 380

Interest Income ($5,000 – 3,861) / 3
Entry would be the same for all three years (last year would
be adjusted for rounding)

c. Cash 5,000
Notes Receivable 5,000
 10

EXERCISE 7-11

(a) Interest bearing note – Option 1:

(a) Sep 30, 2020 Notes Receivable $105,000

Accounts Receivable $105,000

Dec 31, 2020 Interest Receivable 2,100

Interest Income ($105,000 x 8% x 3/12) 2,100

Sep 30, 2021 Cash 113,400

Interest Receivable 2,100
Interest Income ($105,000 x 8% x 9/12) 6,300
Notes Receivable 105,000

(b) Non-interest bearing note – Option 2:

Sep 30, 2020 Notes Receivable $105,000

Accounts Receivable $105,000

Dec 31, 2020 Notes Receivable 2,100

Interest Income ($105,000 x 8% x 3/12) 2,100

Sep 30, 2021 Notes Receivable 6,300

Interest Income 6,300

Cash 113,400
Notes Receivable 113,400

(c) There is no difference in the amount of interest income earned in 2020 and 2021
because both options bear interest at 8%. The “non-interest bearing” note has the
interest included in the face amount of the note and is journalized to account for this.
The actual interest earned is the same under both options.

(a) The liquidity of Big Corp. at December 31, 2020 will remain unchanged whichever
option is selected. Under option 1, the note balance remains at $105,000 but interest
receivable of $2,100 results in a total of $107,100 under current assets. Under Option 2,
the balance of the note, after recording the accrual of interest income is also $107,100
under current assets. The cash flows will also be the same under both options as the
amount collected at the maturity of the note is $113,400.
 11

EXERCISE 7-12

(a) PV of Note:
N = 1, I = 12, FV = 35,000
CPT PV = 31,250

Sep 1, 2020 Notes Receivable 31,250

Sales Revenue 31,250

Dec 31, 2020 Notes Receivable ($31,250 x 12% x 4/12) 1,250

Interest Income 1,250

Sep 1, 2021 Notes Receivable ($ 31,250 x 12% x 8/12) 2,500

Interest Income 2,500

Cash 35,000
Notes Receivable 35,000

(b) Cash 28,000

Impairment loss 4,500
Notes Receivable ($31,250 +$1,250) 32,500

(c) To decrease collection risk, Myo could have:

1. Required cash on delivery (COD) for at least a portion of the order
2. Required instalment payments (instead of one lump-sum payment in one year)
3. Applied more rigorous collection procedures, including frequent phone calls to Khin
to determine any changes in credit risk associated with the note receivable
4. Referred collection of the note receivable to an external collection agency
 12

EXERCISE 7-13

(a) 1. PV of Note:
N = 4, I = 12, FV = 1,101,460
CPT PV = 700,000 (rounded)

Jul 1, 2020 Notes Receivable 700,000

Land 590,000
Gain on Sale of Land 110,000

Dec 31, 2020 Notes Receivable ($700,000 x 12% x ½) 42,000

Interest Income 42,000

Dec 31, 2021 Notes Receivable 89,040

Interest Income 89,040
(700,000 x 12% x ½) + (784,000* x 12% x ½)
* 700,000 + 42,000 + 42,000

Dec 31, 2022 Notes Receivable 97,725

Interest Income 97,725
(784,000 x 12% x ½) + (878,080* x 12% x ½)
* $784,000 + 47,040 + 47,040

Dec 31, 2023 Notes Receivable 111,692

Interest Income 111,692
(878,080 x 12% x ½) + (983,450* x 12% x ½)
* $878,080 + 52,685 + 52,685

Jul 1, 2024 Notes Receivable (983,450 x 12% x ½)

(rounded) 59,003
Interest Income 59,003

Cash 1,101,460
Notes Receivable 1,101,460

 13

2. PV of Note:
N = 8, I = 12, PMT = 12,000, FV = 400,000
CPT PV = 221,165

Jul 1, 2020 Notes Receivable 221,165

Service Revenue 221,165

Dec 31, 2020 Notes Receivable 13,270

Interest revenue ($221,165 x 12% x ½) 13,270

Jul 1, 2021 Cash 12,000

Notes Receivable 1,270
Interest Revenue 13,270

Note receivable balance becomes:

$221,165 + 13,270 + 1,270 = $235,705

Dec 31, 2021 Notes Receivable 14,142

Interest revenue ($235,705 x 12% x ½) 14,142

Jul 1, 2021 Cash 12,000

Notes Receivable 2,142
Interest Revenue 14,142

Note receivable balance becomes:

$235,705 + 14,142 + 2,142 = $251,989

Dec 31, 2021 Notes Receivable 15,119

Interest revenue ($251,989 x 12% x ½) 15,119

Jul 1, 2022 Cash 12,000

Notes Receivable 3,119
Interest Revenue 15,119

Note receivable balance becomes:

$251,989 + 15,119 + 3,119 = $270,227

Dec 31, 2022 Notes Receivable 16,214

Interest revenue ($270,227 x 12% x ½) 16,214

 14

3. PV of Note:
N = 4, I = 10, PMT = 20,000
CPT PV = 63,397

Notes Receivable 63,397

Accounts Receivable 63.397

(b) Date Payment Interest Principal Balance

Jul 1, 2020 $63,397
Jul 1, 2021 $20,000 $6,340 $13,660 49,737
Jul 1, 2022 20,000 4,974 15,026 34,711
Jul 1, 2023 20,000 3,471 16,529 18,182
Jul 1, 2024 20,000 1,818 18,182 -

From the perspective of Agincourt, an instalment note reduces the risk of non-
collection when compared to a non-interest-bearing note. In the case of the non-
interest-bearing note, the full amount is due at the maturity of the note. The instalment
note provides a regular reduction of the principal balance in every payment received
annually. This is demonstrated in the effective interest table illustrated above for the
instalment note.
 15

EXERCISE 7-14

(a) PV of note:
N = 2, I = 12, FV = 200,000
CPT PV = $159,439

Notes Receivable 159,439

Service Revenue 159,439

(b) Notes Receivable 19,133

Interest Income ($159,439 x 12%) 19,133

(c) Notes Receivable 21,429

Interest Income [($159,439 + 19,133) x 12%)] 21,429

Cash 200,000
Notes Receivable 200,000

(d) The balance of the note at December 31, 2020 is $178,572. The note would be
classified as a current asset on the SFP as the maturity date of the note of December
31, 2021 is within the next fiscal year.

(e) 2021 & 2022 interest income would be $20,281 per year.
[($200,000 – 159,439) / 2 = $40,561 / 2 years = $20,281]

(f) Fair value of the consulting services provided can be used to value and record the
transaction, instead of fair value of the note received.
 16

PROBLEM 7.7

(a) Oct 1, 2020 Notes Receivable 150,000

Sales Revenue 150,000

Dec 31, 2020 Interest Receivable 3,750

Interest Income 3,750
($150,000 x 10% x 3/12)

Oct 1, 2021 Cash 15,000

Interest Receivable 3,750
Interest Income 11,250

Dec 31, 2021 Interest Receivable 3,750

Interest Income 3,750

Oct 1, 2022 Cash 165,000

Interest Receivable 3,750
Interest Income 11,250
Notes Receivable 150,000

(b) Oct 1, 2020 Notes Receivable 150,000

Sales Revenue 150,000

Dec 31, 2020 Interest Receivable 3,750

Interest Income 3,750
($150,000 x 10% x 3/12)

Jan 1, 2021 Interest Income 3,750

Interest Receivable 3,750

Oct 1, 2021 Cash 15,000

Interest Income 15,000

Dec 31, 2021 Interest Receivable 3,750

Interest Income 3,750

Jan 1, 2022 Interest Income 3,750

Interest Receivable 3,750

Oct 1, 2022 Cash 165,000

Interest Income 15,000
Notes Receivable 150,000
 17

PROBLEM 7.8

(a) PV of Note:
N = 4, I = 11, PMT = 18,000
CPT PV = 55,844

Date Payment Interest Principal Balance

Dec 31, 2020 $55,844
Dec 31, 2021 $18,000 $6,143 $11,857 43,987
Dec 31, 2022 18,000 4,939 13,161 30,826
Dec 31, 2023 18,000 3,391 14,609 16,217
Dec 31, 2024 18,000 1,783 16,217 -

(b) 1. Cash 36,000

Notes Receivable 55,844
Service Revenue 91,844

2. Cash 18,000
Notes Receivable 11,857
Interest Revenue 6,143

3. Cash 18,000
Notes Receivable 13,161
Interest Revenue 4,939

4. Cash 18,000
Notes Receivable 14,609
Interest Revenue 3,391

5. Cash 18,000
Notes Receivable 16,217
Interest Revenue 1,783

(c) From the perspective of Zhang, an instalment note reduces the risk of non-collection
when compared to a non-interest-bearing note. For a non-interest-bearing note, the full
amount is due at the maturity of the note. An instalment note provides interest and a
reduction of the principal balance in every annual payment received. This is
demonstrated in the instalment note receivable schedule. In addition, receiving cash
earlier enables it to be used for other purposes.
 18

PROBLEM 7.9

a. 1. Cash inflows from notes:

2020 2021 2022 2023 2024

9% Note receivable
Principal $600,000 $600,000 $600,000
Interest* 162,000 108,000 54,000

8% Note receivable
Principal 400,000
Interest 32,000 32,000 32,000

Non-interest-bearing note
receivable
Payment 200,000

Instalment contract
receivable
Down payment 60,000
Payments 45,125 45,125 45,125 45,125

6% Note receivable
Principal 200,000
Interest ______ 6,000 ______ ______ ______

$854,000 $991,125 $1,331,125 $45,125 $45,125

* 9% Note receivable interest payment calculations:

2020: $1,800,000 X 9% = $162,000
2021: ($1,800,000 - $600,000) X 9% = $108,000
2022: ($1,800,000 - $600,000 - $600,000) X 9% = $54,000
 19

2. Interest Income reported in 2020:

Note Receivable—Sale of Division

Interest earned – Jan 1 to May 1
$1,800,000 x 9% x 4/12) $ 54,000
Interest earned – May 1 to Dec 31
$1,200,000 x 9% x 8/12 72,000 $ 126,000

Note Receivable—Employees
Interest earned Jan 1 – Dec 31
$400,000 x 8% 32,000

Zero-interest-bearing Note—Patent
PV of Note:
N = 2, I = 12, FV = 200,000
CPT PV = 159,438

Interest earned to December 31

$159,438 x 12% x 9/12 14,349

Instalment Contract—Sale of Land

Interest accrued from July 1 to Dec 31
$140,000 X 11% X 6/12 7,700

Note Receivable - Saini

Interest earned Aug 1 to Dec 31
$200,000 x 6% x 5/12 5,000

Total Interest Income reported in 2020 $185,049

3. Notes and interest reported as current assets:

Current portion of notes receivable

—Sale of Division (Note 1) $600,000
Accrued interest on note—Sale of
Division, from May 1 – Dec 31
($1,200,000 x 9% x 8/12) 72,000 $672,000
Current portion of instalment contract (Note 3) 29,725
Accrued interest—Instalment contract 7,700 37,425
Note receivable from customer 200,000
Accrued interest—customer note 5,000 205,000
Total current notes and interest $914,425
 20

4. Notes and interest reported as long-term investments:

Note receivable—Sale of Division $ 600,000 Note 1

Note receivable—Employees 400,000
Zero-interest-bearing Note—Patent 173,787 Note 2
Instalment Contract—Sale of Land 110,275 Note 3
Total long-term investment $1,284,062

b. Desrosiers Ltd.
Long-Term Receivables Section
of Statement of Financial Position
December 31, 2020

9% note receivable from sale of division,

due in annual instalments of $600,000 to
May 1, 2022, less current instalment $600,000 Note 1
8% note receivable from officer, due Dec. 31,
2022, collateralized by 10,000 shares of
Desrosiers Ltd., common shares with a
fair value of $450,000 400,000
Zero-interest-bearing note from sale of patent,
due April 1, 2022 173,787 Note 2
Instalment contract receivable, due in
annual instalments of $45,125 to July 1,
2024, less current instalment 110,275 Note 3
Total long-term receivables $1,284,062

c. Desrosiers Ltd.
Selected Statement of Financial Position Balances
December 31, 2020

Note receivable from customer $200,000

Current portion of long-term receivables:
Note receivable from sale of division $600,000 Note 1
Instalment contract receivable 29,725 Note 3
Total current portion of long-term receivables $629,725

Accrued interest receivable:

Note receivable from sale of division $72,000 Note 4
Instalment contract receivable 7,700
Note receivable from customer 5,000
Total accrued interest receivable $84,700
 21

(d) Desrosiers Ltd.

Interest Income from Long-Term Receivables
For the Year Ended December 31, 2020
Interest income:
Note receivable from sale of division $126,000
Note receivable from sale of patent 14,349 Note 2
Note receivable from employee 32,000
Instalment contract receivable from sale of land 7,700
Note receivable from customer 5,000
Total interest income for year ended Dec 31, 2020 $185,049

Note 1 - Long-term Portion of 9% Note Receivable at Dec 31, 2020

Face amount, May 1, 2019 $1,800,000

Less instalment received May 1, 2020 600,000
Balance, Dec 31, 2020 1,200,000
Less instalment due May 1, 2021 600,000
Long-term portion, Dec 31, 2020 $ 600,000

Note 2 - Zero-Interest-Bearing Note

Balance, Apr 1, 2020 159,438

Add interest earned to Dec 31, 2020 14,349
Balance, Dec 31, 2020 $ 173,787

Note 3 - Long-term Portion of Instalment Contract

Contract selling price, Jul 1, 2020 $ 200,000

Less down payment 60,000
Balance, Dec 31, 2020 140,000
Less instalment due, Jul 1, 2021
[$45,125 – ($140,000 x 11%)] 29,725
Long-term portion, Dec 31, 2020 $ 110,275

Note 4 - Accrued Interest—Note Receivable, Sale of Division

Interest accrued from May 1 – Dec 31

($1,200,000 x 9% x 8/12) $ 72,000