Scribd
Upload
5K views6 pages

Equipment Sale and Note Receivable Analysis

1. Savage Company should report $3,216,000 in sales revenue for the note receivable issued on January 1, 2020 with annual payments of $600,000 for 7 years at a 10% interest rate. 2. For the note receivable issued by Humility Company on December 31, 2020 with annual payments of $500,000 for 10 years at an 8% interest rate, the carrying amount to report on December 31, 2020 is $3,125,000. 3. For the two notes receivable issued by Jovial Company at year-end, the note from Zeta Company due in 9 months at a 3% interest rate should be reported at $994,000,

Uploaded by

Adyang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
5K views6 pages

Equipment Sale and Note Receivable Analysis

1. Savage Company should report $3,216,000 in sales revenue for the note receivable issued on January 1, 2020 with annual payments of $600,000 for 7 years at a 10% interest rate. 2. For the note receivable issued by Humility Company on December 31, 2020 with annual payments of $500,000 for 10 years at an 8% interest rate, the carrying amount to report on December 31, 2020 is $3,125,000. 3. For the two notes receivable issued by Jovial Company at year-end, the note from Zeta Company due in 9 months at a 3% interest rate should be reported at $994,000,

Uploaded by

Adyang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
  • Problem 3
  • Problem 4
  • Problem 1
  • Problem 2
  • Problem 6
  • Problem 5
  • Problem Solutions

PROBLEM 1

On January 1, 2020, Savage Company sold goods to another entity. The buyer signed a noninterest-
bearing note requiring payment of P600,000 annually for seven years. The first payment was made
on January 1, 2020.
The prevailing rate of interest for this type of note at date of issuance was 10%.
Present Present value of
Periods value of 1 ordinary annuity of
at 10% 1 at 10%
6 0.56 4.36
7 0.51 4.87
What amount should be reported as sales revenue?

PROBLEM 2
On December 31, 2020, Humility Company sold a machine to another entity in exchange for a
noninterest-bearing note requiring ten annual payments of P500,000. The buyer made the first
payment on December 31, 2020.
The market interest rate for similar notes at date of issuance was 8%.
Present Present value of
Period value of 1 ordinary annuity of
at 8% 1 at 8%
9 0.5 6.25
10 0.46 6.71
On December 31, 2020, what is the carrying amount of note receivable?

PROBLEM 3
At year-end, Jovial Company, received two P1,000,000 notes receivable from customers in exchange
for services rendered.
On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and
payable at maturity.
The note from Zeta Company, made under customary trade terms, is due in nine months and the note
from Yola Company is due in five years.
The market interest rate for similar notes was 8%.
The present value of 1 due in nine months is .944 and the present value of 1 due in five years is .68.
1. At what amount should the note receivable from Zeta Company be reported at year-end?
2. At what amount should the note receivable from Yola Company be reported at year-end?

PROBLEM 4
Persevere Company is a dealer in equipment. On December 31, 2020, the entity sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500,000. The first
payment was made on December 31, 2021.
The market interest rate for similar notes was 8%.
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 period 3.99
1. On December 31, 2020, what is the carrying amount of note receivable?
2. What amount of interest income should be reported for 2021?
3. What is the carrying amount of the note receivable on December 31, 2021?
4. What amount of interest income should be reported for 2022?

PROBLEM 5
On December 31, 2020, Precious Coinpany sold an equipment with carrying amount of P2,000,000
and received a noninterest-bearing note requiring payment of P500,000 annually for ten years. The
first payment is due December 31, 2021.
The prevailing rate of interest for this type of note at date of issuance is 12%.
Present value of 1 at 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.65
1. On December 31, 2020, what is the carrying amount of the note receivable?
2. What is the gain on sale of equipment to be recognized in 2020?
3. What amount of interest income should be recognized for 2021?
4. What is the carrying amount of the note receivable on December 31, 2021?

PROBLEM 6
On December 31, 2020, Chang Company sold a machine in the ordinary course of business to Door
Company in exchange for a noninterest bearing note requiring ten annual payments of Pl,000,000.

The entity made the first payment on December 31, 2020. The market interest rate for similar notes
at date of issuance was 8%.
PV of an ordinary annuity of 1 at 8% for 9 periods 6.25
PV of an ordinary annuity of 1 at 8% for 10 periods 6.71
1. On December 31, 2020, what is the carrying amount of the note receivable?
2. What amount should be reported as interest income for 2021?
3. What is the carrying amount of the note receivable on December 31, 2021?

PROBLEM 7
On January 1, 2020, Mill Company sold a building and received as consideration P 1,000,000 cash
and a P4,000,000 noninterest bearing note due on January 1, 2023.
There was no established exchange price for the building and the note had no ready market.
The prevailing rate of interest for a note of this type on January 1, 2020 was 10%. The present value
of 1 at 10% for three periods is 0.75.
What amount of interest revenue should be reported for 2021?

PROBLEM 8
On January 1, 2020, Alan Company sold equipment with a carrying amount of P4,800,000 in
exchange for a P6,000,000 noninterest-bearing note due January 1, 2023. There was no established
exchange price for the equipment.
The prevailing rate of interest for a similar note was 10%. The present value of 1 at 10% for three
periods is 0.75.
What amount should be reported as interest income for 2020?

PROBLEM 9
On January 1, 2020, Allure Company sold an equipment with a carrying amount of P800,000,
receiving a noninterest bearing note due in three years with a face amount of P1,000,000. There is no
established market value for the equipment.
The interest rate on similar obligations is 12%. The present value of 1 at 12% for three periods is .712.
1. What amount should be reported as gain or loss on the sale of equipment in 2020?
2. What is the carrying amount of note receivable on December 31, 2020?
3. What amount should be reported as interest income for 2021?
2,616,000 PV
600,000 DP
3,216,000

NR 3,600,000
Cash 600,000
3,216,000 Sales 3,216,000
UII 984,000

3,125,000

1,000,000
782,000

1,995,000
159,600
1,654,600
132,368

2,825,000
825,000
339,000
2,664,000

6,250,000
500,000
5,750,000

330,000 3,000,000
300,000

450,000
(88,000) 712,000
797,440 85,440
95,693 797,440

Common questions

Powered by AI

Using different interest rates for valuation is significant because it helps align financial reporting with market conditions and ensures that present value calculations reflect economic realities. Different rates, such as the market interest rate at issuance or a prevailing rate at a later date, affect the discounting of cash flows, the carrying value of assets and liabilities, and the accurate recognition of revenue and interest income .

It is important to distinguish between ordinary annuity and annuity due because they differ in timing of payments. An ordinary annuity involves payments at the end of each period, while an annuity due involves payments at the beginning. This difference affects the present value calculation - An annuity due has a higher present value than an ordinary annuity because each payment is effectively received one period earlier .

Changes in the market interest rate affect the valuation of a long-term note receivable by altering its present value. An increase in market interest rate leads to a decrease in present value, reducing the note's carrying amount, while a decrease in market interest rate increases the present value, thus elevating the carrying amount. This fluctuation influences the reported interest income and financial statements .

Interest income from notes receivable is influenced by the prevailing market interest rate at the time of issuance, the payment structure of the note, and the time period over which the interest accrues. The income is calculated based on the carrying amount of the note at the beginning of the period multiplied by the effective interest rate .

The carrying amount of a noninterest-bearing note at year-end is determined by calculating its present value using the market interest rate as the discount rate. For instance, if a note has annual payments, the present value is calculated by multiplying the payment amount by the present value of an ordinary annuity factor at the market interest rate for the number of periods remaining .

An equipment sale using a noninterest-bearing note necessitates complex accounting treatment because the transaction involves implicitly included interest, thus requiring the allocation of payment between principal and imputed interest. Accurate financial reporting demands recognizing the time value of money, which entails calculating present values for proper revenue recognition and carrying amount determinations during asset sales .

When there is no established market price for equipment, the gain or loss on sale can be determined by comparing the carrying amount of the equipment with the present value of the consideration received. The present value can be calculated using a derived discount rate based on similar market rates, acknowledging any differences between the face and present values of any noninterest-bearing note received as payment .

The method of receiving payments affects the carrying amount at year-end by influencing the schedule and amount of cash flows considered in present value calculations. With annual payments, each payment is separately discounted to its present value at the market interest rate, cumulatively impacting the carrying amount based on payment timing and rates. Thus, a front-loaded payment structure results in higher initial carrying amounts compared to end-loaded structures .

Financial accounting standards accommodate the absence of a note's market by requiring the use of discounted cash flow models to estimate the present value using a surrogate market interest rate, reflecting similar instruments or derived trends. They guide the separation of imputed interest from principal, ensuring that the accounting valuation accurately represents economic substance and compliance with fair value accounting principles .

Noninterest-bearing notes impact financial reporting and analysis by altering the recognition of revenue and interest income. They require the use of present value calculations to recognize the revenue at a discounted value, reflecting the time value of money, rather than the face value of the note. This affects key financial metrics such as profitability ratios and liquidity assessments, as income is recognized progressively over time rather than upfront .

You might also like