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Accounting Problems on Notes Receivable

1) Savage Company sold goods to another entity on January 1, 2020 and received a non-interest bearing note requiring annual payments of $600,000 for seven years. Using a 10% interest rate, the present value of the seven payments is $2,616,000, which should be reported as sales revenue. 2) On December 31, 2020, Humility Company sold a machine in exchange for a non-interest bearing note requiring ten annual payments of $500,000. Using an 8% interest rate, the present value of the ten payments is $3,125,000, which is the carrying amount of the note on December 31, 2020. 3) The presentation covered accounting problems and

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33 views8 pages

Accounting Problems on Notes Receivable

1) Savage Company sold goods to another entity on January 1, 2020 and received a non-interest bearing note requiring annual payments of $600,000 for seven years. Using a 10% interest rate, the present value of the seven payments is $2,616,000, which should be reported as sales revenue. 2) On December 31, 2020, Humility Company sold a machine in exchange for a non-interest bearing note requiring ten annual payments of $500,000. Using an 8% interest rate, the present value of the ten payments is $3,125,000, which is the carrying amount of the note on December 31, 2020. 3) The presentation covered accounting problems and

Uploaded by

Chen Hao
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Acctg

Intermediate
Accounting 1
Acctg.

Notes Receivable
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Problem 6-8: On Jan. 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 Jan. 1,
2020
The prevailing rate of interest for this type of note at date of issuance was 10%
Periods Present Present value of
value of 1 at ordinary annuity of
10% at 10%
6 .56 4.36
7 .51 4.87

 What amount should be reported as sales revenue


A 3,216,000
B 2,922,000
C 2,616,000
D 2,142,000
Acctg

Problem 6-8: On Jan. 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 Jan. 1,
2020
The prevailing rate of interest for this type of note at date of issuance was 10%
Periods Present Present value of
value of 1 at ordinary annuity of
10% 1 at 10%
6 .56 4.36
7 .51 4.87

 What amount should be reported as sales revenue


A 3,216,000 First payment 1/1 600,000
B 2,922,000
PV of 6 payments (600K x 4.36) 2,616,000
C 2,616,000
D 2,142,000 Sales revenue 3,216,000
Acctg

Problem 6-9: On Dec. 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
Dec. 31, 2020.
The market interest rate for similar notes at date of issuance was 8%.
Periods Present Present value of
value of 1 at ordinary annuity of
8% 1 at 8%
9 0.50 6.25
10 0.46 6.71

 On Dec. 31, 2020, what is the carrying amount of note?


A 2,250,000
B 2,300,000
C 3,125,000
D 3,355,000
Acctg

Problem 6-9: On Dec. 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
Dec. 31, 2020.
The market interest rate for similar notes at date of issuance was 8%.
Periods Present Present value of
value of 1 at ordinary annuity of
8% 1 at 8%
9 0.50 6.25
10 0.46 6.71

 On Dec. 31, 2020, what is the carrying amount of note?


A 2,250,000
B 2,300,000
P500,000 x 6.25 = P3,125,000
C 3,125,000
D 3,355,000
Acctg

Problem 6-9: On Dec. 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
Dec. 31, 2020.
The market interest rate for similar notes at date of issuance was 8%.
Periods Present Present value of
value of 1 at ordinary annuity of
8% 1 at 8% If we replace the date to Dec 1,
9 0.50 6.25 2020 the answer would be letter
“D” (P500,000 x 6.71)
10 0.46 6.71

 On Dec. 31, 2020, what is the carrying amount of note?


A 2,250,000
B 2,300,000
P500,000 x 6.25 = P3,125,000
C 3,125,000
D 3,355,000
Acctg

End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:


Conrado T. Valix, [Link]

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