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FINANCIAL ACCOUNTING AND REPORTING

NOTES RECEIVABLE AND LOAN IMPAIRMENT
1. On January 1, 2019, an entity sold equipment with a carrying amount of P4,800,000 in exchange for P6,000,000
noninterest bearing note due January 1, 2020. There was no established exchange price for the equipment. The
prevailing interest rate for this note was 10%. The present value of 1 at 10% for three periods is 0.75.
1. What amount should be reported as gain or loss on sale equipment in 2019?
a. 1,200,000 gain
b. 2,700,000 gain
c. 300,000 gain
d. 300,000 loss
2. What amount should be reported as interest income for 2019?
a. 600,000
b. 500,000
c. 450,000
d. 400,000

3. What amount should be reported as interest income for 2020?

a. 480,000
b. 495,000
c. 528,000
d. 500,000
2. On December 31, 2019, an entity sold used equipment with carrying amount of P2,000,000 in exchange for a
noninterest bearing note of P5,000,000 requiring ten annual payments of P500,000. The first payment was made on
December 31, 2020. The market interest for similar note was 12%. The present value of an ordinary annuity of 1 is
5.65 for ten periods and 5.33 for nine periods.
1. What is the carrying amount of the note receivable on December 31, 2019?
a. 5,000,000
b. 2,825,000
c. 2,665,000
d. 4,500,000
2. What is the gain on sale of equipment to be recognized in 2019?
a. 3,000,000
b. 2,175,000
c. 825,000
d. 0
3. What amount should be recognized as interest income for 2020?
a. 600,000
b. 339,000
c. 319,800
d. 300,000
4. What is the carrying amount of the note receivable on December 31, 2020?
a. 2,664,000
b. 4,500,000
c. 3,164,000
d. 2,325,000

3. Solid Bank loaned P7,500,000 to a borrower on January 1, 2017. The terms of the loan were payment in full on
January 1, 2022 plus annual interest payment at 12%.
The interest payment was made as scheduled on January 1, 2018. However, due to financial setbacks, the borrower
was unable to make the 2019 interest payment.
The bank considered the loan impaired and projected the cash flows from the loan on December 31, 2019.
The bank had accrued the interest on December 31, 2018 but did not continue to accrue interest for 2019 due to the
impairment of the loan.
The projected cash flows are:

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Date of cash flow Amount projected December 31, 2019

December 31, 2020 500,000
December 31, 2021 1,000,000
December 31, 2022 2,000,000
December 31, 2023 4,000,000

Present value of 1 at 12%

For one period .89

For two periods .80
For three periods .71
For four periods .64

1. What is the present value of the cash flows from the loan receivable on December 31, 2019?
a. 5,225,000
b. 7,500,000
c. 5,376,000
d. 4,800,000
2. What amount should be recognized as impairment loss for 2019?
a. 2,275,000
b. 3,175,000
c. 5,225,000
d. 2,175,000
3. What amount should be reported by the bank as interest income for 2020?
a. 627,000
b. 900,000
c. 567,000
d. 0
4. What is the carrying amount of the loan receivable on December 31, 2020?
a. 5,352,000
b. 4,752,000
c. 5,225,000
d. 7,000,000

Theory
1. Accounting for the imputed interest on a noninterest bearing note receivable is an example of what aspect of
accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Accounting entity
2. What is imputed interest?
a. Interest based on stated interest rate
b. Interest based on implicit interest rate
c. Interest based on average interest rate
d. Interest rate based on bank prime rate
3. The interest on a noninterest bearing notes is equal to
a. The excess of the face value over the present value
b. The excess of the present value over the face value
c. The excess of the market value over the present value
d. Zero
4. On August 15, an entity sold goods for which it received a note bearing the market rate of interest on that date. The
four-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note
was recorded on August 15, which of the following accounts increased?
a. Unearned discount

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b. Interest receivable
c. Prepaid interest
d. Interest revenue
5. On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The
face amount of the note receivable and the entire amount of the interest are due on June 30 of next year. On
December 31 of the current year, the entity should report in the statement of financial position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of next year
d. Interest receivable for the interest accruing in the current year
6. 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
b. I and II only
c. I and III only
d. I, II and III
7. The “amortized cost” of loan receivable is the amount at which
a. The loan receivable is measured initially minus principal repayment, plus or minus the cumulative
amortization of any difference between the initial amount recognized and the principal maturity amount,
minus reduction for impairment.
b. The loan receivable is measured initially minus principal repayment, plus or minus the cumulative
amortization of any difference between the initial amount recognized and the principal maturity amount.
c. The loan receivable is measured initially.
d. The loan receivable is measured initially minus principal repayment.
8. Subsequent to initial recognition, a loan receivable shall be measured at
a. Cost
b. Amortized cost using the straight line method
c. Amortized cost using the effective interest method
d. Fair value
9. Which of the following is not objective evidence of impairment of a financial asset?
a. Significant financial difficulty of the issuer or obligor.
b. A decline in the fair value of the financial asset below the previous carrying amount.
c. A breach of contract, such as a default or delinquency in interest or principal payment.
d. The lender, for economic or legal reason relating to the borrower’s financial difficulty, grants to the borrower
a concession that the lender would not otherwise consider.
10. If there is evidence that an impairment loss on 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 the carrying amount.

END

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NOTES RECEIVABLE Impairment of Loan

- claims supported by formal promises to pay usually Company – creditor
in the form of notes
Other party – is in financial difficulty (borrower)
 Short-term
a. Interest Bearing
b. Non-Interest Bearing **CA of LR xx
PV of cash inflows (using orig. effective rate) (xx)
1. Conceptually/Theoretically – Present Value Impairment of Loan xx
2. Conventionally/Usually – Face Value

 Long-term **CA of LR = Principal + Accrued Interest recorded

Initial:
a. Interest Bearing – Face Value or PV upon
Issuance
Impairment – valuation account (allowance for impairment)
b. Noninterest Bearing – PV or discounted
value of future cash flows using effective Interest Income – effective interest method
interest rate
Subsequent: Amortized cost using Effective Interest
Method PAS 39, paragraph 58, provides that an entity shall
assess at every end of reporting period whether there is
objective evidence that a financial asset or group of financial
assets is impaired.
Face Value of Note xx
PV of Note (xx) If such evidence exists, the entity shall determine and
Unearned Interest Income xx recognize the amount of any impairment loss.
Objective evidence of impairment may result from the
*Sale Price xx following “loss events” occurring after the initial recognition
CA of Asset (xx) of the financial asset:
G/L on Sale xx
1. Significant financial difficulty of the issuer or obligor.
2. Breach of contract, such as default or delinquency in
** Sale Price = Cash Received/Downpayment + PV of Note interest or principal payment.
3. Debt restructuring
The lender, for economic or legal reason relating to the
Dishonored Notes borrower’s financial difficulty, grants to the borrower a
concession that the lender would not otherwise
- When a promissory note matures and is not paid, it consider.
is said to be dishonored
- Should be removed from the note receivable account 4. Probability that the borrower will enter bankruptcy or
and transferred to Accounts Receivable other financial reorganization.
- Amount debited to Accounts Receivable should 5. The disappearance of an active market for the financial
include Face Amount, interest and other charges asset because of financial difficulty.
6. Observable data indicating that there is a measurable
The entry to record dishonored notes is as follows: decrease in the estimated future cash flows from a
group of financial assets since the initial recognition of
Accounts Receivable xx those assets, although the decrease cannot yet be
Notes Receivable xx identified with the individual financial assets in the
Interest Income xx group.
#

Such approach is defended on the ground that the overdue

note has lost part of its status as a negotiable instrument and
really represents only an ordinary claim against the maker.

LOANS RECEIVABLE
- Financial asset arising from a loan granted by a
bank or other financial institution to a borrower or
client
Measurement:
Principal + Direct origination cost incurred – Origination fee
received from borrower

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