THEORY OF ACCOUNTS

1. In calculating the carrying amount of loan receivable, the lender adds to the principal
I. Direct origination cost
II. Indirect origination cost
III. Origination fee charged to borrower
a. I only
c. I and III only
b. I and II only
d. I, II, and III
2. Subsequent to initial recognition, a loan receivable shall be measured at
a. Cost
c. Amortized cost using the effective interest
b. Amortized cost using the straight line
method
method
d. Fair value
3. If there is evidence that an impairment loss on a loan receivable has been incurred, the loss is equal to the
a. Excess of the carrying amount of the loan receivable over the present value of the cash flows related to
the loan
b. Excess of the present value of cash flows related to the loan over the carrying amount of the loan
receivable
c. Excess of the carrying amount of the loan over the principal amount of the loan
d. Excess of the principal amount of the loan over its carrying amount.
4. ABC Bank loaned an amount on January 1, 2013, the proceeds of which will be used to finance its planned
expansion in the latter half of the year. The carrying amount of the loan on initial recognition exceeded the
proceeds received. Which of the following situations could have caused this?
a. The direct origination costs incurred were less than the origination fees charged.
b. The indirect origination costs incurred, which were less than the loan origination fees charged, were
more than the direct origination costs incurred.
c. The origination fees charged were less than the direct origination costs incurred.
d. The origination fees charged were more than the indirect origination costs incurred. The indirect
origination costs incurred were more than the direct origination costs incurred.
5. XYZ Bank entered into contract of loan on December 31, 2013, with a face amount of 5,000,000 and interest of
12% payable annually every January 1 thereafter, starting January 1, 2014, for 5 years. At the end of 2015, the
creditor began to experience financial difficulties and was unable to repay the required interest payment. XYZ
forgave the interest on the loan as the collection is unlikely, but the principal amount will be due in installments
of 1,000,000 at each interest payment date. What time value of money concept must XYZ Bank use to compute
the present value of remaining cash flows?
a. Present value of 1
c. Present value of an annuity due of 1
b. Present value of an ordinary annuity of 1
d. Future value of 1
6. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. The note receivable
discounted account was appropriately credited. The note receivable discounted accounted should be reported as
a. Contra-asset account for the proceeds from the discounting transaction
b. Contra-asset account for the face amount of the note
c. Liability account for the proceeds from the discounting transaction
d. Liability account for the face amount of the note
7. If receivables are hypothecated against borrowings, the amount of receivables involved should be
a. Disclosed in the notes
b. Excluded from the total receivables with disclosure
c. Excluded from the total receivables with no disclosure
d. Excluded from the total receivables and a gain or loss recognized between the face value and the amount
of borrowings.

8. After being held for 30 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%.
The amount received from the bank is equal to
a. Maturity value at 15% less discount at 12%
b. Maturity value at 12% less discount at 15%
c. Maturity value at 12% less discount at 12%
d. Maturity value at 15% less discount at 15%
9. All but one of the following are required before a transfer of receivables can be recorded as a sale.
a. The transferred receivables are beyond the reach of the transferor and its creditors.
b. The transferor has not kept effective control over the transferred receivables through a repurchase
agreement
c. The transferor maintains continuing involvement
d. The transferee can pledge or sell the transferred receivables.
10.
11. PROBLEM 1. (Journal Entries)
12. The Voice Bank loaned a borrower P5,000,000 on January 1, 2013, payable in 3 years plus 8% annual interest,
starting December 31. Data related to the loan are:
13.
14. Principal amount
15. P 5,000,000
16. Origination fees charged
17. 500,000
18. Direct origination cost incurred
19. 250,000
20.
21. After considering the origination fees charged to the borrower and the direct origination cost incurred, the
effective rate on the loan is 9.97%.
22.
23. Prepare all indicated entries for 2013, 2014, and 2015.
24.
25. PROBLEM 2. (Journal Entries)
26. The Voice Bank loaned a borrower P3,000,000 on January 1, 2013, payable in 3 years plus 8% annual interest,
starting December 31. Data related to the loan are:
27.
28. Principal amount
29. P 3,000,000
30. Origination fees charged
31. 130,700
32. Direct origination cost incurred
33. 280,000
34. Indirect origination cost incurred
35. 65,000
36.
37. After considering the origination fees charged to the borrower and the direct origination cost incurred, the
effective rate on the loan is 6.16%.
38.
39. Prepare all indicated entries for 2013, 2014, and 2015.
40.
41.
42. PROBLEM 3. (Journal Entries)
43. Cozy Bank loaned a borrower P12,150,000 on January 1, 2011. The terms of the loan were payment in full on
January 1, 2016, plus annual interest payment at 12%. The interest payment was made as scheduled on
January 1, 2012. However, due to financial setbacks, the borrower was unable to make its 2013 interest
payment. The bank considered the loan impaired and projected the cash flows from the loan on December 31,
2013.
44.

45. The bank accrued the interest on December 31, 2012, but did not continue to accrue interest for 2013 due to the
impairment of the loan. The effective rate after impairment would be 14%.
46. The projected cash flows are:
47.
48.
50.
52.
54.
56.
58.
59.

Date of cash flow

December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017

49. Amount projected on 12/31/13

51. P
810,000
53. 1,620,000
55. 3,240,000
57. 6,480,000

Prepare the entries for 2013, 2014, 2015, 2016, and 2017. Round off PV to 2 decimal places.

60. PROBLEM 4. (Journal Entries)

61. On December 31, 2013, Durable Bank has a loan receivable of P6,750,000, from a borrower that it is carrying at
face value and is due on December 31, 2018. Interest on the loan is payable at 7% each December 31. The
borrower paid the interest due on December 31, 2013 but informed the bank that it would probably miss the next
two years interest payments because of financial difficulty. After that, the borrower is expected to resume its
annual interest payment but it would make the principal payment one year late, with interest paid for that
additional year at the time of payment.
62.
63. Prepare all entries from 2013 to 2019. Round off PV factors to 3 decimal places.
64.
65. PROBLEM 5.
66. Knowhow Bank loaned P10,000,000 to a borrower on January 1, 2011. The terms of the loan require principal
payments of P2,000,000 each year for 5 years plus interest at 10%.
67.
68. The first principal and interest payment is due on January 1, 2012. The borrower made the required payments
during 2012 and 2013. However, during 2013 the borrower began to experience financial difficulties, requiring
the bank to reassess the collectability of the loan. On December 31, 2013, the bank has determined that the
remaining principal payment will be collected but the collection of the interest is unlikely. The bank accrued the
interest for 2013.
69.
70. The principal payments are expected to be P1,000,000 on January 1, 2013, P2,000,000 on January 1, 2014 and
P3,000,000 on January 1, 2015. Round off present value factors to two decimal places.
71.
1. What is the loan impairment loss on December 31, 2013?
a. 1,180,000
c. 1,290,000
b. 2,000,000
d. 1,780,000
2. What is the interest income for 2014?
a. 531,000
c. 600,000
b. 431,000
d. 500,000
3. What is the carrying amount of the loan receivable on December 31, 2014?
a. 5,000,000
c. 4,310,000
b. 4,741,000
d. 3,122,000
e.
f.

PROBLEM 6.

g. Harrison Company has a loan receivable with a carrying value of P15,000 at December 31, 2010. On
January 3, 2011, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates
that it will collect only 60% of the loan balance.

1. Which of the following entries would Harrison make to record the impairment under IFRS?

j.

h.

a. Loan Receivable

i.

Impairment Loss

b.
k.

l.

6,000

Loan Receivable

6,000

Impairment Loss

9,000

Loan Receivable

n. d.
o.

9,000

Loan Recovery Expense

c.
m.

9,000

9,000

Impairment Loss

6,000

Loan Receivable

6,000

p.
q.
r.
2. Assume that on January 5, 2012, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As
a result, Harrison now estimates that all but P1,500 will be repaid on the loan. Under IFRS, which of the
following entries would be made on January 5, 2012?
s.

a.

Loan Receivable

t.

Recovery of Impairment Loss

u. b.

Loan Receivable

v.

4,500
1,500

Recovery of Impairment Loss

w. c.

Bad Debt Expense

x.
y.

4,500

Impairment Loss

1,500
1,500
1,500

d. No journal entry is allowed under IFRS.

z.

aa. PROBLEM 7.
ab. On December 1, 2013, Breakout Company assigned specific accounts receivable totaling P2,000,000
as collateral on a P1,500,000, 12% note from a certain bank. Breakout Company will continue to
collect the assigned accounts receivable. In addition to the interest on the note, the bank also
charged a 5% finance fee deducted in advance on the P1,500,000 value of the note. The December
collections of the assigned accounts receivable amounted to P1,000,000 less cash discount of P50,000.
On December 31, 2013, Breakout Company remitted the collections to the bank in payment for the
interest accrued on December 31, 2013 and the note payable.
ac.
1. What amount of cash was received from the assignment of accounts receivable on December 31, 2013?
a. 2,000,000
c. 1,900,000
b. 1,500,000
d. 1,425,000
2. What is the carrying amount of note payable on December 31, 2013?
a. 500,000
c. 565,000
b. 550,000
d. 730,000
3. What amount should be disclosed as the equity of Breakout Company in assigned accounts on December 31,
2013?
a. 500,000
c. 435,000
b. 450,000
d. 270,000
e.
f.

PROBLEM 8.

g. Brawny Company factored P8,000,000 of accounts receivable to a finance entity on July 1 of the
current year. Control was surrendered by Brawny Company. The factor assessed a fee of 5% and
retained a holdback equal to 10% of the accounts receivable. In addition, the factor charged 15%
interest computed on a weighted average time to maturity of the accounts receivable of 30 days.
h.
1. What amount was initially received by Brawny Company from the factoring?
a. 6,701,370
c. 7,501,370
b. 6,800,000.
d. 6,700,000
2. Assuming all receivables are collected, what is the cost of factoring?
a. 400,000
c. 898,630
b. 498,630
d. 98,630
e.
f. PROBLEM 9.
g. Tender Company accepted from a customer a P4,000,000, 90-day, 12% note dated August 31, 2013.
On September 30, 2013, the entity discounted without recourse the note at 15%. However, the
proceeds were not received until October 1, 2013. In the income statement for the year ended
September 30, 2013, what amount should be reported as loss on note receivable discounting?
a. 17,000
c. 40,000
b. 23,000
d. 0
e.
f.

PROBLEM 10.

g. On November 1, 2013, Duress Company discounted with recourse at 10% a one-year, non-interest
bearing, P2,050,000 note receivable maturing on January 31, 2013. The discounting of the note
receivable is accounted for as a conditional sale with recognition of a contingent liability.
h.
1. What amount of contingent liability should be disclosed in the financial statements for 2012?
a. 2,050,000
c. 2,033,333
b. 2,000,000
d. 0
2. How much did Duress receive from the discounting transaction?
a. 0
c. 2,033,333
b. 2,000,000
d. 1,998,750
e.
f. PROBLEM 11.
g. Undaunted Company discounted its own P5,000,000 one-year note at a bank, at a discount rate of
8%, when the prime rate was 6%. In recording the note in the statement of financial position prior to
maturity, what rate should be used for the recording of interest expense?
a. 6.00%
c. 8.00%
b. 6.42%
d. 8.70%
e.
f. PROBLEM 12.
g. Sun Inc. factors P2,000,000 of its accounts receivables without recourse for a finance charge of 5%.
The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. Sun estimates the fair value of the recourse liability at P75,000. What would be
recorded as a gain (loss) on the transfer of receivables?
h. a. Loss of P100,000.
c. Gain of P175,000.
i. b. Loss of P375,000.
d. Loss of P75,000.
j.
k. PROBLEM 13.

l.

Mark Co. assigned P400,000 of accounts receivable to Kwik Finance Co. as security for a loan of
P335,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note
was 10%. During the first month, Mark collected P110,000 on assigned accounts after deducting
P380 of discounts. Mark accepted returns worth P1,350 and wrote off assigned accounts totaling
P2,980.

1.The amount of cash Mark received from Kwik at the time of the transfer was
m. a.
P301,500.
b. P327,000.
2.Entries during the first month would include a

c. P328,300.

d. P335,000.

n.
o.
p.
q.
r.

a.
b.
c.
d.

debit to Cash of P110,380.

debit to Bad Debt Expense of P2,980.
debit to Allowance for Doubtful Accounts of P2,980.
debit to Accounts Receivable of P114,710.

s.
t.

PROBLEM 14.
On February 1, 2010, Vinson Company factored receivables with a carrying amount of P300,000 to
Jessie Company. Jessie Company assesses a finance charge of 3% of the receivables and retains 5% of
the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be
reported in the income statement of Vinson Company for February. The recourse obligation has a fair
value of P1,500.

1.Assume that Vinson factors the receivables on a without recourse basis. The loss to be reported is
u.

a. P0.

b. P9,000.

c. P15,000.

d. P24,000.

v.
2.Assume that Vinson factors the receivables on a with recourse basis. The loss to be reported is
w. a.
x.
y.

P9,000.

b. P10,500.

c. P15,000.

d. P25,500.

z. PROBLEM 15. (Journal Entries)

aa. Prepare the necessary entries in the books of Walleye Company to record the following transactions.
ab.
ac.
ad. The entity sold merchandise for P500,000 accepting a note of P500,000
J
ae.
M
ag.

for six months with interest to be paid at maturity at 12%.

af. The entity discounted the note without recourse at its local bank at
15%.
ah. The customer paid the bank in full.

J
ai.
aj. PROBLEM 16. (Journal Entries)
ak. Prepare all entries in the books of Morale Company, assuming the discounting transaction is
accounted for as a conditional sale.
al.
am.Sale of merchandise, P2,050,000 to a customer, FOB destination, 2/10,
M

n/30.

an.

ao. Receipt of a 60-day, 12% note dated April 5 from the customer.

ap. The face of the note was the amount of the invoice minus freight
charge of P50,000 paid by the customer in connection with the March

aq.

14 sale.
ar. The note of the customer was discounted with the bank at 15%.

A
as.
J
au.
J

at. Receipt of notification from the bank that the customer dishonored its
note. Accordingly, the entity paid the bank the amount due including
protest fee and other charges of P10,000.
av. Receipt of cash from the customer for the full amount of its
indebtedness plus interest on the original face value.

aw.
ax. PROBLEM 17. (Journal Entries)
ay. On January 1, 2013, Machete Company sold land with carrying amount of P1,500,000 in exchange
for a 9-month, 10% note with face value of P2,000,000. The 10% rate properly reflects the time value
of money for this type of note. On April 1, 2013, the entity discounted the note with recourse. The
bank discount rate is 12%. The discounting transaction is accounted for as a secured borrowing. On
October 1, 2013, the maker dishonored the note receivable. The entity paid the bank the maturity
value of the note plus protest fee of P10,000. On December 31, 2013, the entity collected the
dishonored note in full plus 12% annual interest on the total amount due.
az.
ba.
bb.
bc.
bd.
be.
bf.
bg.
bh.
bi.
bj.
bk. SUGGESTED ANSWERS
bl.
bm.1. A
bn. 2. C
bo. 3. A
bp. 4. C
bq. 5. C

6. B
7. A
8. B
9. C

br.
bs. PROBLEM 5.
bt. 1. C
bu. 2. B
bv. 3. B
bw.
bx. PROBLEM 6.
by. 1. D
bz. 2. A
ca.
cb. PROBLEM 7.
cc. 1. D
cd. 2. C
ce. 3. C
cf.
cg. PROBLEM 8.
ch. 1. A
ci. 2. B
cj.

ck. PROBLEM 9. B
cl.
cm. PROBLEM 10.
cn. 1. A
co. 2. D
cp.
cq. PROBLEM 11. D
cr.
cs. PROBLEM 12. A
ct.
cu. PROBLEM 13.
cv. 1. C
cw. 2. C
cx.
cy. PROBLEM 14.
cz. 1. B
da. 2. B

db.
dc. (JOURNAL ENTRIES)
dd.

de. Particulars

df.

dg.

di.

dj.

dk.

dl.

dm.Loans Receivable

do.

dp.

1/

dn.

D
dh.
P

Cash

dq.
5
dr.

ds. Cash
dt.

du.
Unearned Interest

dv.

Income

dw.
5

dx.

dy. Unearned Interest Income

ea.

dz.

Cash

eb.
ec.
2

ed.

ee.

ef.

eg.

eh.

ei. Cash

ek.

el.

12

ej.

Interest Income

4
em.
4

en.

eo. Unearned Interest Income

eq.

ep.

Interest Income

er.
es.
7

et.

eu. Cash

12

ev.

ew.
Interest Income

ex.

4
ey.
4

ez.

fa. Unearned Interest Income

fc.

fb.

Interest Income

fd.
fe.
8

ff.

fg. Cash

12

fh.

fi.
Interest Income

fj.

4
fk.
4

fl.

fm. Unearned Interest Income

fo.

fn.

Interest Income

fp.
fq.
9

fr.

fs. Cash
ft.

fu.
Loans Receivable

fv.

5
fw.
5

fx.

fy.

fz.

ga.

gb.

gc.

gd.

ge.

gf.

gg.

gh.

gi.

gj.

gk. Loans Receivable

gm.

gn.

1/

gl.

Cash

go.
3
gp.

gq. Cash
gr.

gs.
Direct origination

costs

gt.

1
gu.
1

gv.

gw. Direct origination costs

gy.

gx.

Cash

gz.
ha.
2

hb.

hc. Indirect origination costs

he.

hd.

Cash

hf.
hg.
6

hh.

hi. Cash

12

hj.

hk.
Interest Income

hl.

2
hm.
2

hn.

ho. Interest Income

hq.

hp.

Direct origination
costs

hr.
hs.
4

ht.

hu. Cash

12

hv.

hw.
Interest Income

hx.

2
hy.
2

hz.

ia. Interest Income

ic.

ib.

Direct origination
costs

id.
ie.
4

if.

ig. Cash

12

ih.

ii.
Interest Income

ij.

2
ik.
2

il.

im. Interest Income

io.

in.

Direct origination
costs

ip.
iq.
5

ir.

is. Cash
it.

iu.
Loans Receivable

iv.

3
iw.
3

iy.

iz.

ja.

jb.

jc. Loan impairment loss

jf.

jg.

12

jd.

Allowance for L/I

je.

Interest receivable

ix.
P

jh.
3
ji.
1

jj.

jk. Cash

12

jl.

jm.
Loans Receivable

jn.

8
jo.
8

jp.

jq. Allowance for L/I

js.

jr.

Interest Income

jt.
ju.
1

jv.

jw. Cash

12

jx.

jy.
Loans Receivable

jz.

1
ka.
1

kb.

kc. Allowance for L/I

ke.

kd.

Interest Income

kf.
kg.
1

kh.

ki. Cash

12

kj.

kk.
Loans Receivable

kl.

km.
3
kn.

ko. Allowance for L/I

kq.

kp.

Interest Income

kr.
ks.
9

kt.

ku. Cash

12

kv.

kw.
Loans Receivable

kx.

6
ky.
6

kz.

la. Allowance for L/I

lc.

lb.

Interest Income

ld.
le.
6

lf.

lg.

lh.

li.

lj.

lk. Loan impairment loss

lm.

ln.

12

ll.

Allowance for L/I

lo.
8
lp.

lq. Cash
lr.

ls.
Interest Income

lt.

4
lu.
4

lv.

lw. Allowance for L/I

ly.

12

lx.

Interest Income

lz.
ma.
4

mb.

mc. Allowance for L/I

me.

12

md.

Interest Income

mf.
mg.

4
mh.

mi.

ml.

mm.

12

mn.

mj.

mk.

Cash

mo.

mp.

Interest Income

4
mq.
4

mr.

ms. Cash

mv.

12

mt.

Interest Income

mu.

Loans Receivable

mw.

7
mx.
4
my.
6

mz.

na.

nb.

nc.

nd.

ne.

nf.

ng.

nh.

ni. Note receivable

nk.

nl.

1/

nj.

Sales

nm.
5
nn.

no. Cash

ns.

3/

np. Loss on discounting

nq.

Note receivable

nr.

Interest income

nu.
nv.

nt.
6

nw.
5
nx.
1

ny.
7/

nz. No entry

oa.

ob.

oc.

od.

oe.

of.

og.

oh.

oi.

oj.

ok.

ol. Accounts receivable

on.

oo.

3/

om.

Sales

op.
2
oq.

or. Note receivable

ou.

4/

os. Freight out

ot.

Accounts
receivable

ow.
ox.

ov.
5

oy.
2

oz.

pa. Cash

pe.

4/

pb. Loss on discounting

pc.

Note receivable
discounted

pd.

Interest income

pg.
ph.

pf.
8

pi.
2
pj.
1

pk.

pl. Accounts receivable

pp.

6/

pm.

Cash

pn. Note receivable

discounted
po.

ps.
pt.

pq.

pr.

pu.

Note receivable
2
pv.
2

pw.

px. Cash

qa.

qb.

7/

py.

Accounts

receivable
pz.

qc.

Interest income

2
qd.
2

qe.

qf.

qg.

qh.

qi.

qj.

qk.

ql.

qm.

qn. Note receivable

qq.

qr.

1/

qo.

Land

qp.

Gain on sale of

qs.

land

1
qt.
5

qu.

qv. Cash

qz.

4/

qw. Interest expense

qx.

Liability for NRD

qy.

Interest Income

rb.
rc.

ra.
2

rd.
2
re.
5

rf.

rg. Accounts receivable

rk.

10

rh.

Cash

ri. Liability for NRD

rj.

Note receivable

rn.
ro.

rl.

rm.

rp.

2
rq.
2

rr.

rs. Cash

12

rt.

rv.
Accounts

receivable
ru.

rw.
rx.

Interest income

2
ry.
6

rz.

sd.

sa.

sb.

sc.