Quiz Chapter 5 Notes Receivable

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Chapter 5 Notes Receivable NAME: Professor:

Section:

Date: Score:

QUIZ 1: 1. Present value is a. the value now of a future amount. b. the amount that must be invested now to produce a known future value. c. always smaller than the future value. d. all of these. 2. Which of the following factors would show the largest value for an interest rate of 12% for six periods? a. Present value of 1 b. Present value of an ordinary annuity of 1 c. Present value of an annuity due of 1 d. Answer cannot be determined 3. What factor should you use if you want to determine the value now of a ₱1,000 payment due in three years’ time? a. Future value of 1 b. Present value of 1 c. Present value of an ordinary annuity of 1 d. Present value of an annuity due of 1 4. What factor should you use for a ₱1,000 note receivable that is collectible in five annual installments of ₱200 starting one year hence? a. Present value of 1 b. Present value of an ordinary annuity of 1 c. Present value of an annuity due of 1 d. Any of these 5. What factor should you use for a ₱2,000 note receivable that is collectible in full after five years? a. Present value of 1 b. Present value of an ordinary annuity of 1 c. Present value of an annuity due of 1 d. Any of these 6. Which of the following results to the smallest value? a. Present value of an annuity due of 1 @12%, n=5 b. Present value of an ordinary annuity of 1 @12%, n=5 c. Present value of 1 @12%, n=5 d. Present value of 1 @14%, n=5 7. A higher interest rate results to

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increased amount of present value. decreased amount of present value. same amount of present value. Answer cannot be determined due to insufficient data

8. A shorter period results to a. increased amount of present value. b. decreased amount of present value. c. same amount of present value. d. shorter accountant. 9. The present value of 1 for a period of zero equals a. 1. b. 0. c. Error! d. Answer depends on the interest rate 10. Multiplying a lump sum future amount by a Present Value of 1 factor results to a. Future amount. b. Future value of 1. c. Present value. d. Present value of 1.

“Be kind and compassionate to one another, forgiving each other, just as in Christ God forgave you.” (Ephesians 4:32) - END -

NAME: Professor: QUIZ 2:

Section:

Date: Score:

Page |3 1. An entity sells goods either on cash basis or on 6-month installment basis. On January 1, 20x1, goods with cash price of ₱50,000 were sold at an installment price of ₱75,000. Which of the following statements is correct? a. Net receivable of ₱75,000 is recognized on the date of sale. b. Net receivable of ₱50,000 is recognized upon full payment of the total price. c. The ₱20,000 difference between the cash price and installment price is recognized as interest income on the date of sale. d. Net receivable of ₱50,000 is recognized on the date of sale. 2. An entity sells goods for ₱150,000 to a customer who was granted a special credit period of 1 year. The entity normally sells the goods for ₱120,000 with a credit period of one month or with a ₱10,000 discount for outright payment in cash. How much is the initial measurement of the receivable? a. 150,000 b. 120,000 c. 130,000 d. 110,000 Use the following information for the next two questions: On January 1, 20x1, ABC Co. sold a transportation equipment with a historical cost of ₱1,000,000 and accumulated depreciation of ₱300,000 in exchange for cash of ₱100,000 and a noninterest-bearing note receivable of ₱800,000 due on January 1, 20x4. The prevailing rate of interest for this type of note is 12%. 3. How much is the interest income in 20x1? a. 68,331 b. 76,532 c. 85,714 d. 96,000 4. How much is the carrying amount of the receivable on December 31, 20x2? a. 800,000 b. 569,424 c. 637,755 d. 714,286 Use the following information for the next three questions: On January 1, 20x1, ABC Co. sold transportation equipment with a historical cost of ₱20,000,000 and accumulated depreciation of ₱7,000,000 in exchange for cash of ₱500,000 and a noninterest-bearing note receivable of ₱8,000,000 due in 4 equal annual installments starting on December 31, 20x1 and every December 31 thereafter. The prevailing rate of interest for this type of note is 12%. 5. How much is the interest income in 20x1? a. 728,946 b. 678,334 c. 728,964 d. 704,236

Page |4 6. How much is the current portion of the receivable on December 31, 20x1? a. 1,271,036 b. 1,423,560 c. 3,380,102 d. 1,594,388 7. How much is the carrying amount of the receivable on December 31, 20x2? a. 4,803,663 b. 3,380,102 c. 6,074,699 d. 6,000,000 Use the following information for the next three questions: On January 1, 20x1, ABC Co. sold transportation equipment with a historical cost of ₱12,000,000 and accumulated depreciation of ₱7,000,000 in exchange for cash of ₱100,000 and a noninterest-bearing note receivable of ₱4,000,000 due in 4 equal annual installments starting on January 1, 20x1 and every January 1 thereafter. The prevailing rate of interest for this type of note is 12%. 8. How much is the interest income in 20x1? a. 408,230 b. 278,334 c. 328,964 d. 288,220 9. How much is the carrying amount of the receivable on December 31, 20x1? a. 1,690,510 b. 892,857 c. 2,690,051 d. 1,594,388 10. How much is the carrying amount of the receivable on January 1, 20x3? a. 892,857 b. 3,380,102 c. 6,074,699 d. 6,000,000 Use the following information for the next two questions: On January 1, 20x1, ABC Co. sold machinery with historical cost of ₱3,000,000 and accumulated depreciation of ₱900,000 in exchange for a 3-year, ₱2,100,000 noninterest-bearing note receivable due in equal semi-annual payments every July 1 and December 31 starting on July 1, 20x1. The prevailing rate of interest for this type of note is 10%. 11. How much is the interest income in 20x1? a. 88,825 b. 177,649 c. 128,964 d. 164,591

Page |5 12. How much is the carrying amount of the receivable on December 31, 20x1? a. 1,241,083 b. 982,378 c. 1,690,051 d. 1,594,388 13. On January 1, 20x1, ABC Co. sold machinery costing ₱3,000,000 with accumulated depreciation of ₱1,100,000 in exchange for a 3-year, ₱900,000 noninterest-bearing note receivable due as follows: Date Amount of installment December 31, 20x1 400,000 December 31, 20x2 300,000 December 31, 20x3 200,000 Total 900,000 The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of the receivable on December 31, 20x1? a. 467,354 b. 438,016 c. 376,345 d. 428,346 Use the following information for the next two questions: On January 1, 20x1, ABC Co. sold inventory costing ₱1,800,000 with a list price of ₱2,200,000 and a cash price of ₱2,000,000 in exchange for a ₱2,400,000 noninterest-bearing note due on December 31, 20x3. 14. How much is the initial measurement of the receivable? a. 1,800,000 b. 2,200,000 c. 2,000,000 d. 2,400,000 15. How much is the carrying amount of the receivable on December 31, 20x1? a. 2,125,390 b. 2,135,341 c. 2,098,343 d. 2,000,000

“Not only so, but we also glory in our sufferings, because we know that suffering produces perseverance;” (Romans 5:3) -END-

Page |6 SOLUTIONS TO QUIZ 2: 1. D 2. D Solution: Normal selling price with credit period of one month Discount for cash on delivery Cash price equivalent of the goods sold

120,000 (10,000) 110,000

3. A Solution: Initial measurement: 800,000 x PV of 1 @12%, n=3 = 569,424 Subsequent measurement: Date Interest income

Unearned interest

Present value

230,576

569,424

162,245 85,714 -

637,755 714,286

1/1/x1 68,331 76,531 85,714

12/31/x1 12/31/x2 12/31/x3

800,000

4. D (See solution above) 5. C Solution: Initial measurement: (8M ÷ 4) x PV ordinary annuity of 1 @12%, n=4 = 6,074,699 Subsequent measurement: Date

Collections

Interest income

Amortization

1/1/20x1

Present value 6,074,699

12/31/20x1

2,000,000

728,964

1,271,036

4,803,663

12/31/20x2

2,000,000

576,440

1,423,560

3,380,102

12/31/20x3

2,000,000

405,612

1,594,388

1,785,714

12/31/20x4

2,000,000

214,286

1,785,714

0

6. B (See solution above) 7. B (See solutions above) 8. D (See solutions below) 9. C Solutions: Initial measurement: (4M ÷ 4) x PV annuity due of 1 @12%, n=4 = 3,401,831 Subsequent measurement: Date

Collections

Interest income

Amortization

Present value

Jan. 1, 20x1 Jan. 1, 20x1 Jan. 1, 20x2 Jan. 1, 20x3 Jan. 1, 20x4

1,000,000 1,000,000 1,000,000 1,000,000

288,220 202,806 107,143

1,000,000 711,780 797,194 892,857

3,401,831 2,401,831 1,690,051 892,857 0

The carrying amount of the notes receivable as of December 31, 20x1 is determined as follows: Carrying amount of notes receivable - Jan. 1, 20x2 1,690,051 Add back: Collection on Jan. 1, 20x2 1,000,000 Carrying amount of notes receivable - Dec. 31, 20x1 2,690,051

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10. A (See solution above) 11. D Solution: Initial measurement: (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6 = 1,776,492 Subsequent measurement: Date

Collections

Interest income

Amortization

Present value

Jan. 1, 20x1 July 1, 20x1 Dec. 31, 20x1 July 1, 20x2 Dec. 31, 20x2 July 1, 20x3 Dec. 31, 20x3

350,000 350,000 350,000 350,000 350,000 350,000

88,825 75,766 62,054 47,657 32,540 16,667

261,175 274,234 287,946 302,343 317,460 333,333

1,776,492 1,515,317 1,241,083 953,137 650,794 333,333 0

Interest income in 20x1 = (88,825 + 75,766) = 164,591 12. A (See solution above) 13. B Solution: Initial measurement: Date

Collections

Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3 Totals

400,000 300,000 200,000 900,000

PV of P1 @ 10%, n= 1 to 3 0.90909 0.82645 0.75131

Present value 363,636 247,935 150,262 761,833

Subsequent measurement: Date

Collections

Interest income

Amortization

Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3

400,000 300,000 200,000

76,183 43,802 18,182

323,817 256,198 181,818

Present value 761,833 438,016 181,818 0

14. C – equal to cash price equivalent. 15. A Solution: First trial: (at 10%) Future cash flows x PV factor at x% = PV of note  2,400,000 x PV of P1 @ 10%, n=3 = 2,000,000  (2,400,000 x 0.751315) = 1,803,156 is not equal to 2,000,000 We need a substantially higher amount of present value. Therefore, we need to decrease substantially the interest rate. Let’s try 6%. Second trial: (at 6%) Future cash flows x PV factor at x% = PV of note  2,400,000 x PV factor at 6%, n=3 = 2,000,000  (2,400,000 x 0.839619) = 2,015,086 is not equal to 2,000,000 We need a slightly lower amount of present value. Therefore, we need to increase slightly the interest rate. Let’s try 7%. Third trial: (at 7%) Future cash flows x PV factor at x% = PV of note  2,400,000 x PV factor at 7%, n=3 = 2,000,000  (2,400,000 x 0.816298) = 1,959,115 is not equal to 2,000,000

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In here, we need to perform interpolation. Looking at the values derived above, we can reasonably expect that the effective interest rate is a rate between 6% and 7%. To perform the interpolation, we will use the following formula: x% 6% 7% 6% Where: x% again is the effective interest rate. The formula was derived based on our expectation that the effective interest rate is somewhere between 6% and 7%.Notice that the lower rate appears in both the numerator and denominator of the formula while x% appears in the numerator. Let us substitute the amounts of present values computed earlier on the formula. 2,000,000

-

2,015,086

1,959,115

-

2,015,086

=

(15,086) (55,970)

=

0.2695

The amount computed is added to 6% to derive the effective interest rate. The effective interest rate is 6.2695% (6% + .2695%). If other methods or tools were used, such as a financial calculator or spreadsheet application, the exact rate is 6.265856927%. The amortization table using 6.2695% as the effective interest rate is presented below. Date

Interest income

Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3

125,390 133,251 141,606

Unearned interest 400,000 274,610 141,359 -247

Present value 2,000,000 2,125,390 2,258,641 2,400,247

Notice that there is still a slight difference of ₱247. However, if this is deemed immaterial, we can regard the computed rate as the effective interest rate.