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    Illustrative Examples - Notes and Loans Receivable

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    Melrose Eugenio Erasga
    1. The document provides several illustrative examples of accounting for notes receivable, loans receivable, and loan impairment. It includes journal entries, calculations of present values, and computations of interest income and loan balances over multiple periods. 2. Specifically, it addresses the accounting for the sale of land and equipment on credit, including determining note receivable balances and gains on sale. It also demonstrates amortization of loans receivable and calculation of effective interest rates. 3. Additionally, the document shows journal entries and calculations for loan impairment, considering probability of default and expected recovery rates in determining loan balances and allowance accounts.

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    © All Rights Reserved
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    Illustrative Examples - Notes and Loans Receivable

    Uploaded by

    Melrose Eugenio Erasga
    61 views4 pages
    1. The document provides several illustrative examples of accounting for notes receivable, loans receivable, and loan impairment. It includes journal entries, calculations of present values, and computations of interest income and loan balances over multiple periods. 2. Specifically, it addresses the accounting for the sale of land and equipment on credit, including determining note receivable balances and gains on sale. It also demonstrates amortization of loans receivable and calculation of effective interest rates. 3. Additionally, the document shows journal entries and calculations for loan impairment, considering probability of default and expected recovery rates in determining loan balances and allowance accounts.

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    Illustrative examples for practical application of concepts

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    1. The document provides several illustrative examples of accounting for notes receivable, loans receivable, and loan impairment. It includes journal entries, calculations of present values, and computations of interest income and loan balances over multiple periods. 2. Specifically, it addresses the accounting for the sale of land and equipment on credit, including determining note receivable balances and gains on sale. It also demonstrates amortization of loans receivable and calculation of effective interest rates. 3. Additionally, the document shows journal entries and calculations for loan impairment, considering probability of default and expected recovery rates in determining loan balances and allowance accounts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    61 views4 pages

    Illustrative Examples - Notes and Loans Receivable

    Uploaded by

    Melrose Eugenio Erasga
    1. The document provides several illustrative examples of accounting for notes receivable, loans receivable, and loan impairment. It includes journal entries, calculations of present values, and computations of interest income and loan balances over multiple periods. 2. Specifically, it addresses the accounting for the sale of land and equipment on credit, including determining note receivable balances and gains on sale. It also demonstrates amortization of loans receivable and calculation of effective interest rates. 3. Additionally, the document shows journal entries and calculations for loan impairment, considering probability of default and expected recovery rates in determining loan balances and allowance accounts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    ILLUSTRATIVE EXAMPLES

    Notes Receivable

    1. Pinnacle Company sold to another entity a tract of land costing P5,000,000 for P7,000,000 on January
    1, 2025. The buyer paid P1,000,000 down and signed a two-year promissory note for the remainder
    of the purchase price plus 12% interest payable annually every December 31. The note matures on
    January 1, 2027.

    Requirement: Prepare journal entries for 2025, 2026 and 2027.

    2. Pinnacle Company manufactures and sells electrical generators. On January 1, 2025, the entity sold
    an electrical generator costing P700,000 for P1,000,000.

    The buyer paid P100,000 down and signed a P900,000 non-interest bearing note payable in three
    equal installments every December 31.

    The prevailing interest rate for a note of this type is 12%. The present value of an ordinary annuity of
    1 for three periods is 2.4018.

    Requirement: Prepare journal entries for the current year.


    3. On December 31, 2025, ABC Company sold an equipment with a carrying amount of P2,000,000 and
    received a non-interest bearing note requiring payment of P500,000 annually for ten years. The first
    payment is due December 31, 2026.

    The prevailing rate of interest for this type of note at date of issuance is 12%

    Present value of 1 at 12% for 10 periods 0.322


    Present value of ordinary annuity of 1 at 12% for 10 periods 5.650

    1. On December 31, 2025, what is the carrying amount of the note receivable?
    a. P5,000,000
    b. P2,175,000
    c. P1,610,000
    d. P2,825,000

    2. What is the gain on sale of equipment to be recognized in 2025?


    a. P3,000,000
    b. P2,175,000
    c. P825,000
    d. P0

    3. What amount of interest income should be recognized for 2026?


    a. P600,000
    b. P339,000
    c. P319,800
    d. P300,000

    4. What is the carrying amount of the note receivable on December 31, 2026?
    a. P2,325,000
    b. P4,500,000
    c. P2,825,000
    d. P2,664,000
    Loans Receivable

    4. XYZ Bank granted a loan to a borrower on January 1, 2025. The interest rate on the loan is 10%
    payable annually starting December 31, 2025. The loan matures in five years on December 31, 2029.

    Principal amount P4,000,000


    Direct origination cost 61,500
    Origination fee received from borrower 350,000

    The effective rate on the loan after considering the direct origination cost and origination fee received is
    12%

    Requirements:
    1. Compute the carrying amount of the loan receivable on January 1, 2025.
    2. Prepare a table of amortization for the loan receivable.
    3. Prepare the journal entries for 2025 and 2026.
    Loan Impairment

    5. On January 1, 2025, ABC Bank loaned P3,000,000 to a borrower. The contract specified that the loan
    had a 6-year term and a 9% interest rate. Interest is payable annually every December 31 and the
    principal amount will be collected on December 31, 2030. Interest is collected for 2025.

    On December 31, 2025, the bank determined that the loan has a 12-month probability of default of
    2% and expected to collect only 90% of the loan.

    On December 31, 2026, the bank determined that there is a significant increase in the credit risk of
    the loan but no objective evidence of impairment. Based on relevant information, the bank
    concluded that there is a 30% probability of default over the remaining term of the loan and it is
    expected that only 60% of the loan will be collected. Interest is collected for 2026.

    On December 31, 2027, the borrower was under financial difficulty and the loan was considered
    impaired. The bank agreed that only 40% of the principal will be collected on the due date. Interest
    is collected for 2027.

    The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods and 0.77 for three periods.

    Requirements:
    1. Prepare the journal entries for 2025, 2026 and 2027.
    2. Compute the carrying amount of the loan receivable on December 31, 2025, 2026 and 2027.

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