Notes Receivable Flashcards
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
The term “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. The $2,000 accrued interest = (.12)(1/12)($200,000).
Answer = C
Frame 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 Frame report as a current asset for interest on the note receivable?
A) $0
B) $4,000
C) $8,000
D) $12,000
As of June 30, 2005, only one payment has been received (July 1, 2004). Thus, $100,000 of principal balance has been outstanding for an entire year as of the balance sheet date. Interest receivable on June 30, 2005 is thus $8,000 (.08 × $100,000).
Answer = C
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
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.
Answer = B
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.
The proceeds on sale are measured as the present value of the note because there is no established market value for the equipment. The loss on sale is computed as:
Carrying amount $480,000
Less proceeds on sale: $600,000(.75) = 450,000
Equals loss on sale $ 30,000
The proceeds do not reflect the entire $600,000, because the difference between the note’s face value of $600,000 and its present value is interest to be recognized over the term of the note.
Answer = A
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
The $610,000 net unearned fee revenue = (21)($30,000) − $20,000. This amount includes the notes received, but does not include the one expected uncollectible note.
The notes receivable balance, recorded along with the unearned revenue, will not reflect the note expected to be uncollectible. Bad debt expense is not recorded for this note because there has been no revenue recognized against which to match the expense.
Answer = C
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
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). No principal payments have yet been made as of this date.
Answer = C
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:
Period Present value of $1 at 8% Present value of
ordinary annuity of $1
at 8%
9 0.50 6.25
10 0.46 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
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.
Answer = C
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
A) $9,440 $8,570
B) $10,000 $8,570
C) $9,440 $10,000
D) $10,000 $10,000
The note from Alpha Co. is a short-term asset. It is reported at the face value of $10,000. 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.
Answer = B
