ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
ASSIGNMENT – NOTES RECEIVABLE
A: The following selected transactions were completed by Eternal Memories
Corporation during 2021:
Aug. 05 Received a 60-day 9% P12,000 promissory note from Choo Co. for
merchandise sold.
Oct. 04 Collected from Choo Co. in settlement of its note dated Aug. 5.
Oct. 10 Received a 30-day 12% P16,000 promissory note from Liverpool
Corporation in settlement of an overdue account.
Nov. 06 Received a 120-day 12% P24,000 promissory note from Vegan Co.
in settlement of an account.
Nov. 09 Liverpool Corporation dishonored its note on maturity date.
Nov. 30 Collected the amount due from Liverpool Corporation on account
of its overdue note. An additional charge for interest at 12% on
maturity value from maturity date is also collected.
Dec. 31 Year-end adjustments are made.
Prepare the journal entries of the foregoing transactions assuming Eternal
Memories Corporation uses a 360-day year.
30 days = 1 month
30 days X 12 months = 360 days
ETERNAL MEMORIES CORPORATION
Aug. 05 Received a 60-day 9% P12,000 promissory note from Choo Co. for
merchandise sold.
Aug 05 Notes Receivable 12,000
Sales 12,000
Oct. 04 Collected from Choo Co. in settlement of its note dated Aug. 5.
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Oct 04 Cash 12,180
Notes Receivable 12,000
Interest Income 180
12,000 X 9% X 60/360
Oct. 10 Received a 30-day 12% P16,000 promissory note from Liverpool
Corporation in settlement of an overdue account.
Oct 10 Notes Receivable 16,000
Accounts Receivable 16,000
Nov. 06 Received a 120-day 12% P24,000 promissory note from Vegan Co.
in settlement of an account.
Nov 06 Notes Receivable 24,000
Accounts Receivable 24,000
Nov. 09 Liverpool Corporation dishonored its note on maturity date.
Nov 09 Accounts Receivable 16,160
Notes Receivable 16,000
Interest Income 160
16,000 X 12% X 30/360
REMINDER: A dishonored note is classified as “Accounts Receivable”
Nov. 30 Collected the amount due from Liverpool Corporation on account
of its overdue note. An additional charge for interest at 12% on
maturity value from maturity date is also collected.
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Nov 30 Cash 16,273.12
Accounts Receivable 16,160.00
Interest Income 113.12
16,160 X 12% X 21/360
Dec. 31 Year-end adjustments are made.
Dec 31 Interest Receivable 440
Interest Income 440
24,000 X 12% X 55/360
This represents accrued interest on the note received from Vegan Co.
B. Aviary Corporation, engaged in raising and sale of poultry and poultry
produce, owned a hatching machine costing P2,400,000 and accumulated
depreciation of P1,600,000. On July 1, 2020, the machine was sold for
P1,000,000. As payment, the buyer issued a 1-year 12% note to Aviary.
Aviary operates on a calendar year.
B1. Prepare all journal entries pertinent to Aviary’s sale of the hatching
machine in the year 2020.
07/01/2 Notes Receivable 1,000,000
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
0
Accumulated Depreciation - 1,600,000
Machinery
Machinery 2,400,000
Gain on Sale – Machinery 200,000
To record sale of the hatching machine
12/31/2 Interest Receivable 60,000
0
Interest Income 60,000
To record ACCRUED interest on the note (July 01 to Dec 31 2020)
P1,000,000 X 12% X 6/12
B2. What amount of Receivables should be reported by Aviary on
December 31, 2020?
Notes Receivable 1,000,000
Interest Receivable 60,000
---------------
Total Receivable 1,060,000
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
C. Aviary Corporation, engaged in raising and sale of poultry and poultry
produce, owned a hatching machine costing P2,400,000 and accumulated
depreciation of P1,600,000. On January 1, 2020, the machine was sold for
P1,000,000. As payment, the buyer issued a 2-year 12% note to Aviary.
Interest on the note is compounded annually and Aviary operates on a
calendar year. Further, the entity adopts the policy of not reversing any
accruals.
C1. Prepare all journal entries pertinent to Aviary’s books of accounts (from
sale of the hatching machine in the year 2020 until the note’s maturity).
01/01/2 Notes Receivable – Long Term 1,000,000
0
Accumulated Depreciation - 1,600,000
Machinery
Machinery 2,400,000
Gain on Sale – Machinery 200,000
To record sale of the hatching machine
12/31/2 Interest Receivable 120,000
0
Interest Income 120,000
To record ACCRUED interest on the note (Jan 01 to Dec 31 2020)
P1,000,000 X 12%
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
12/31/2 Notes Receivable – Current 1,000,000
0
Notes Receivable – Long Term 800,000
To reclassify the notes receivable
12/31/2 Cash 1,254,400
1
Notes Receivable – Current 1,000,000
Interest Receivable 120,000
Interest Income 134,400
To record maturity of the note
Face value of the note 1,000,000
ADD: Interest on the note for one year (Jan 01, 2020 to Dec
31, 2020) 120,000
P1,000,000 X 12%
----------------
Total 1,120,000
MULTIPLY: Interest rate 12%
----------------
Interest on note for another year (Jan 01, 2021 to Dec 31, 134,400
2021)
C2. What amount of Receivables should be reported by Aviary on
December 31, 2020?
Notes Receivable – Current 1,000,000
Interest Receivable 120,000
---------------
Total Receivable 1,120,000
D. On January 01, 2018, Congo Retailers sold its Packaging Machine costing
P700,000 with accumulated depreciation of P350,000. As consideration,
Congo received P100,000 cash and a three-year P300,000 non-interest
bearing note. The prevailing interest rate for a note of this type is 10%.
D1. Prepare the journal entry to record the sale of the packaging
equipment:
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
01/01/1 Cash 100,000
8
Notes Receivable – Long Term 300,000
Accumulated Depreciation 350,000
Loss on Sale – Packaging 24,610
Equipment
Packaging Equipment 700,000
Unearned Interest Income 74,610
Take note of the following:
The notes receivable is collectible on a lumpsum basis, which is after
three (3) years.
The present value of 1 at 10% for three (3) periods is 0.7513. This
may be computed manually as 1 / (1 + .10) (1 + .10) (1 + .10) =
0.7513. Hence, the present value of the note is P225,390 (P300,000 X
0.7513).
The difference between the face value of the note (P300,000) and the
present value of the note (P225,390) is the “Unearned Interest
Income” (P74,610). The “Unearned Interest Income” is often referred
to or described as the “Discount on Notes Receivable”.
The “Loss on Sale” (P24,610) is the difference between the sale price
(P100,000 Cash PLUS P225,390 the Present Value of the note) and the
book value or carrying value of the Packaging Equipment (P700,000
MINUS P350,000)
D2. Prepare an amortization table for the Unearned Interest Income using
the Effective Interest Method.
Date Interest Income Unearned Present Value
(A) (B) Interest (C) (D)
D X Rate C–B D+B
Jan. 01, 2018 74,610 225,390
Dec. 31, 2018 22,539 52,071 247,929
Dec. 31, 2019 24,793 27,278 272,722
Dec. 31, 2020 27,278 0 300,000
------------
74,610
ADAMSON UNIVERSITY
ACCOUNTANCY DEPARTMENT
INTERMEDIATE ACCOUNTING 1
Note that P272,722 X 10% is only P27,272. The difference between
P27,278 and P27,272 is deficiency due to rounding.
