Notes Rec Flashcards
Equipment sold Jan’ 04 - CV of $480,000 in exchange for $600,000 non interest-bearing note, due Jan ‘07. No established exchange price for equip. Prevailing rate of interest for note type on Jan ‘04 was 10%. Present value of $1 at 10% for 3 periods is 0.75.
Income statement - What amt should be reported as interest inc?
A. $9,000
B. $45,000
C. $50,000
D. $60,000
B
$600,000 x .75 = $450,000 (Initial recorded value of note)
$450,000 x .10 = $45,000 (Interest income for 1st year)
- Note not recorded at $600,000 because amt includes interest that will be recognized in future
Co. uses the installment sales method to recognize revenue. Customers pay the installment rates in 24 equal payments, which include 12% interest.
What in an installment note’s rec balance 6 months after the sale?
A. 75 % of the original sale
B.
C
Notes are reported at present value, which is the amount of interest yet to be recognized.
Co. has an 8% note receivable, in the original amount of $150,000, dated June 30, 2003. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 2004, 2005, and 2006.
In its June 30, 2005, balance sheet, what amount should Co. report as a current asset for interest on the note receivable?
A. $0
B. $4,000
C. $8,000
D. $12,000
C
$150,000 - $50,000 = $100,000 (remaining principle balance - amt remaining after the only payment received)
$100,000 x .08 = $8,000
Each of Potter Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of $30,000.
By December 31, 2005, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 2006 and December 31, 2007.
Experience indicates that one franchise will default on the additional payments. Services for the initial fee will be performed in 2006.
What amount of net unearned franchise fees would Potter report on December 31, 2005?
A. $400,000 B. $600,000 C. $610,000 D. $630,000
C
($30,000 x 21) - $20,000 = $610,000
On December 1, 2005, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan.
Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, 2006. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000.
What amount of accrued interest receivable should Tigg include in its December 31, 2005 balance sheet?
A. $4,450 B. $2,166 C. $2,000 D. $0
C
($200,000) x (.12) x (1/12) = $2,000
“accrued interest receivable” refers to the cash amount of interest due. The cash amount of interest due is based on the contractual interest rate and face value. The loan origination fee is a way of increasing the effective interest but it does not affect the cash interest component
On June 1, 2005, Yola Corp. loaned Dale $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, 2006. In connection with this loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Dale after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2005. Dale made timely payments through November 1, 2005. On January 2, 2006, Yola received payment of the first principal installment plus all interest due.
On December 31, 2005, Yola’s interest receivable on the loan to Dale should be
A. $0 B. $5,000 C. $10,000 D. $15,000
C
Because the last interest payment was made on November 1, the interest for November and December is unpaid as of December 31, 2005. Therefore, two months of interest is receivable, as of December 31, 2005, for a total receivable of $10,000 = (2/12)(12%)($500,000).
On Merf’s April 30, 2004, balance sheet, a note receivable was reported as a noncurrent asset and its accrued interest for eight months was reported as a current asset. Which of the following terms would fit Merf’s note receivable?
A. Both principal and interest amounts are payable on August 31, 2004 and August 31, 2005. B. Principal and interest are due December 31, 2004. C. Both the principal and the interest amounts are payable on December 31, 2004 and December 31, 2005. D. Principal is due August 31, 2005. Interest is due August 31, 2004 and August 31, 2005.
D
Generally, the principal amount of a note is due when the last interest payment is due. Therefore, because the note is classified noncurrent, the principal would be due on an August 31 at least one year after April 30, 2004,
On January 2, 2003, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, 2006.
There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 2003, was 10%. The present value of $1 at 10% for three periods is 0.75.
In Emme’s 2003 income statement, what amount should be reported as gain (loss) on sale of machinery?
A. ($30,000) loss. B. $30,000 gain. C. $120,000 gain. D. $270,000 gain.
A
CV Amt $480,000
Less Sale Proceeds: 450,000
Equals loss on sale: $30,000
Computation for proceeds on sale
$600,000 x (.75) = $450,000
On December 31, 2005, Jet Co. received two $10,000 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 Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2005 was 8%. The compound interest factors to convert future values into present values at 8% follow:
Present value of $1 due in nine months: .944
Present value of $1 due in five years: .680
At what amounts should these two notes receivable be reported in Jet’s December 31, 2005, balance sheet?
Hart Maxx $9,440 $6,800 $9,652 $7,820 $10,000 $6,800 $10,000 $7,820
Hart $10,000 - Maxx $7,820
9-mo note is reported at FV because current notes need not be measured at PV.
5-yr note is reported at $7,820, the present value of future cash flows
Computation:
$10,000 + $10,000(.03)(5 years)], which is the present value of the note plus the present value of the 3% interest.
On December 31, 1999, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31, 1999, balance sheet?
Alpha Omega $ 9,440 $ 8,570 $10,000 $ 8,570 $ 9,440 $10,000 $10,000 $10,000
Alpha $10,000 - Omega $8570
9-mo note is reported at FV
2-yr note computation:
$10,000 x .857, which is the present value of the note plus the present value of the 8% interest.
The note from Omega is discounted as a single sum for two time periods at 8% to be reported at $10,000X.857=$8,750.
On December 30, 2005, Chang Co. sold a machine to Door Co. in exchange for a noninterest-bearing note requiring ten annual payments of $10,000. Door made the first payment on December 30, 2005. The market interest rate for similar notes at the date of issuance was 8%. Information on present value factors is as follows:
8% PV PV of ORDAnn
Period 9 .50 6.25
10 .46 6.71
In its December 31, 2005, balance sheet, what amount should Chang report as note receivable?
A. $45,000 B. $46,000 C. $62,500 D. $67,100
C
The note receivable should be reported at the present value of the nine remaining payments. The first payment was made at the date of the sale. The remaining nine payments comprise an ordinary annuity as of December 31, 2005 because the next payment is due one year from that date.
Therefore, the present value and reported note value on that date is 6.25($10,000) = $62,500.
Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485.
What should be the total interest revenue earned by Leaf over the life of this note?
A. $5,045 B. $5,560 C. $8,000 D. $9,000
B
Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) - $19,485 = $5,560.
Leaf paid $19,485 for the note, and will receive 5($5,009) over the note term. The difference is interest revenue.
Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years.
The market rate for a note of this type is 10%. On issuing the note, Jole should record
Disc on note rec Deferred chrg Yes Yes Yes No No Yes No No
Yes - Yes
There are two major issues embedded in this question:
Accounting for a noninterest-bearing note, and
Accounting for a future discount to be received as part of the compensation for the loan.
For accounting purposes, a market rate of interest must be imputed for noninterest notes (and those with an unrealistic stated interest rate) and the note recorded at its present value.
The difference between the present value of the note and the cash to be received from the note is recognized as part of the cost of goods to be acquired in the future at a discount and recorded as a deferred charge (like a “prepayment”). The entry for Jole Co. would be:
DR: Note Receivable [1] $10,000
Deferred Charge [2] 2,487
CR: Discount on Note [1] $ 2,487
Cash 10,000
[1] PV of Note = $10,000 x (PV of $1 @ 10% for 3 years)
= $10,000 x .75131
= $ 7,513
Face of Note $10,000 - PV ($7,513) = Discount
[2] PV of Note ($7,513) - Cash ($10,000) = Deferred Charge ($2,487)
On August 15, 2005, Benet Co. 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, 2005.
Note that the principal, together with all interest, is due November 15, 2005.
When the note was recorded on August 15, which of the following accounts increased?
A. Unearned discount. B. Interest receivable. C. Prepaid interest. D. Interest revenue.
B
The note was received one month into its term. Like a bond issued between interest dates and which collects accrued interest from the bondholder since the most recent interest payment date, this note is recorded with interest receivable for one month.
Benet earns only three months of interest revenue because that is the length of time it will hold the note
