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  • 7103 - Notes Receivable and Loan Impairment

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    Gerardo Yadawon
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    This document contains 4 examples involving notes receivable, loan impairment, and interest income calculations. It provides the key details of the notes and loans such as principal amounts, interest rates, payment terms, and impairment considerations. It then asks multiple choice questions related to calculating the gain/loss on sale, interest income, carrying amounts, and impairment losses for the notes and loans.

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    This document contains 4 examples involving notes receivable, loan impairment, and interest income calculations. It provides the key details of the notes and loans such as principal amounts, interest rates, payment terms, and impairment considerations. It then asks multiple choice questions related to calculating the gain/loss on sale, interest income, carrying amounts, and impairment losses for the notes and loans.

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    47 views2 pages

    7103 - Notes Receivable and Loan Impairment

    Uploaded by

    Gerardo Yadawon
    This document contains 4 examples involving notes receivable, loan impairment, and interest income calculations. It provides the key details of the notes and loans such as principal amounts, interest rates, payment terms, and impairment considerations. It then asks multiple choice questions related to calculating the gain/loss on sale, interest income, carrying amounts, and impairment losses for the notes and loans.

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    © All Rights Reserved
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    of 2

    CPA REVIEW SCHOOL OF THE PHILIPPINES

    Manila

    FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS


    BATCH 93 – MAY 2023 CPALE

    NOTES RECEIVABLE AND LOAN IMPAIRMENT

    1. On December 31, 2023, 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, 2024. The market interest for similar note was 12%. The present
    value of an ordinary annuity of 1 at 12% is 5.65 for ten periods and 5.33 for nine periods.
    1. What amount should be reported as gain on sale of equipment in 2023?
    a. 3,000,000
    b. 2,175,000
    c. 825,000
    d. 0
    2. What amount should be recognized as interest income for 2024?
    a. 600,000
    b. 339,000
    c. 319,800
    d. 300,000
    3. What is the carrying amount of the note receivable on December 31, 2024?
    a. 2,664,000
    b. 4,500,000
    c. 2,825,000
    d. 2,325,000
    2. Solid Bank loaned P7,500,000 to a borrower on January 1, 2023. The terms of the loan were payment in
    full on December 31, 2027 plus annual interest payment at 12% beginning December 31, 2023. The
    interest payment was made as scheduled on December 31, 2023. However, due to financial setbacks,
    the borrower was unable to make the December 31, 2024 interest payment. The bank considered the
    loan impaired and projected the cash flows from the loan on December 31, 2024. The bank had accrued
    the interest on December 31, 2024.
    Date of cash flow Amount projected December 31, 2024 Present value of 1 at 12%
    December 31, 2025 500,000 One period .89
    December 31, 2026 1,000,000 Two periods .80
    December 31, 2027 2,000,000 Three periods .71
    December 31, 2028 4,000,000 Four periods .64
    1. What amount should be recognized as impairment loss for 2024?
    a. 2,275,000
    b. 3,175,000
    c. 5,225,000
    d. 2,175,000
    2. What amount should be reported by the bank as interest income for 2025?
    a. 627,000
    b. 900,000
    c. 567,000
    d. 0
    3. What is the carrying amount of the loan receivable on December 31, 2025?
    a. 5,352,000
    b. 4,725,000
    c. 5,225,000
    d. 7,000,000

    7103
    Page 2

    3. On January 1, 2023, an entity sold equipment with a carrying amount of P4,800,000 in exchange for a
    P6,000,000 noninterest bearing note due December 31, 2025. There was no established exchange price
    for the equipment. The prevailing rate of interest for a note of this type on January 1, 2023 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 of equipment?
    a. 300,000 loss
    b. 300,000 gain
    c. 1,200,000 gain
    d. 2,700,000 gain
    2. What amount should be reported as interest income for 2023?
    a. 495,000
    b. 450,000
    c. 555,000
    d. 600,000
    4. On January 1, 2023, Fine Bank loaned P5,000,000 to a borrower. The contract specified that the loan has
    a 6-year term and a 10% interest rate. Interest is payable annually every December 31 and the principal
    amount is due on December 31, 2028.
    On December 31, 2023 based on relevant information, the bank determined that the loan has a 12-month
    probability of default of 10% and that it expected to collect only P4,500,000 of the loan. Interest is
    collected for 2023. The present value of 1 at 10% for 5 periods is 0.62.
    On December 31, 2024, 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 in 2024, the bank concluded that there is a 30% probability of default over
    the remaining term of the loan and it is expected that only P3,000,000 of the loan will be collected. Interest
    is collected for 2024. The present value of 1 at 10% for 4 periods is 0.68.
    On December 31, 2025, the borrower is considered under financial difficulty and the loan is impaired
    because there is an objective evidence of impairment. The bank agreed that only P2,000,000 of the
    principal will be collected on due date. Interest is collected for 2025. The present value of 1 at 10% for 3
    periods is 0.75.
    1. What amount of impairment loss should be recognized for 2023?
    a. 2,790,000
    b. 2,210,000
    c. 500,000
    d. 221,000
    2. What amount of impairment loss should be recognized for 2024?
    a. 2,040,000
    b. 2,000,000
    c. 888,000
    d. 667,000
    3. What amount of impairment loss should be recognized for 2025?
    a. 2,960,000
    b. 3,000,000
    c. 2,612,000
    d. 3,500,000
    4. What amount should be recognized as interest income for 2026?
    a. 200,000
    b. 500,000
    c. 150,000
    d. 0

    End

    7103

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