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Interest Bearing Note - Periodic Collection (Interest Only) Premium

MAMA Co. sold a building to MOH Co. for a 5-year, 12% promissory note of PHP 5 million. The note will be collected through annual interest payments of PHP 600,000 on December 31 of each year until 2025. The prevailing interest rate was 10%. The premium on the note receivable is PHP 378,980 and will be amortized over the life of the note.

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262 views2 pages

Interest Bearing Note - Periodic Collection (Interest Only) Premium

MAMA Co. sold a building to MOH Co. for a 5-year, 12% promissory note of PHP 5 million. The note will be collected through annual interest payments of PHP 600,000 on December 31 of each year until 2025. The prevailing interest rate was 10%. The premium on the note receivable is PHP 378,980 and will be amortized over the life of the note.

Uploaded by

Shannon
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INTEREST-BEARING PERIODIC COLLECTION PREMIUM ON N/R

NOTE (INTEREST ONLY)

MAMA Co. received from MOH Co. a 5-year, 12% note on January 1, 2020 for P5,000,000 which is
due on Jan. 1, 2025 for the sale of the building. The cash price of the building is not readily
determinable. The carrying value of the building on the date of sale is P4,200,000. On January 1,
2020, the prevailing rate of interest for a similar obligation is 10%. Annual interest is receivable
every December 31.

Interest = 5,000,000 x 12%

= 600,000

Down payment 0
Present Value of Future Cash Inflows 5,378,980 Initial CV of N/R in the
(5,000,000 x 0.6209) = 3,104,500 amortization table
+ (600,000 x 3.7908) = 2,274,480
5,378,980
Sales Price of Building 5,378,980

Face Value 5,000,000


Present Value (5,378,980)
Premium on Notes Receivable 378,980

AMORTIZATION TABLE EFFECTIVE RATE < NOMINAL


RATE

PREV. CV OF NOTES -
FACE VALUE x EFFECTIVE RATE x CV AMORTIZATION OF
NOMINAL RATE OF N/R NOMINAL - EFFECTIVE PREMIUM
Date Nominal Interest Effective Interest Amortization of CV of Notes
(12%) (10%) Premium Receivable
1/1/20 - - - 5,378,980
12/31/20 600,000 537,898 62,102 5,316,878
12/31/21 600,000 531,688 68,312 5,248,566
12/31/22 600,000 524,857 75,143 5,173,423
12/31/23 600,000 517,342 82,658 5,090,765
12/31/24 600,000 509,235 90,765 5,000,000
Interest Income 378,980

JE: Cash 600,000 Interest Income 62,102


12/31/20 Interest Income 600,000 Premium on N/R 62,102

SHORTCUT METHOD FORMULA: CV x 1.ER – Cash Inflows

Date CV of N/R
1/1/20 5,378,980
12/31/20 5,316,878 = 5,378,980 x 1.10 – 600,000
12/31/21 5,248,566 = 5,378,980 x 1.10 – 600,000 x 1.10 – 600,000
12/31/22 5,173,423 = 5,378,980 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000
12/31/23 5,090,765 = 5,378,980 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000
12/31/24 5,000,000 = 5,378,980 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000 x 1.10 – 600,000
REQUIRED: (FAQs)

1. How much is the Gain or Loss on Sale of Building?

Sales Price 5,378,980


Carrying Value of Building (4,200,000)
Gain on Sale (Profit or Loss) 1,178,980

2. How much is the Interest Income for the year 2021? See amortization table!

Interest Income = CV x Effective Rate x Time

Interest Income (2021) = 12/31/2020 CV x ER x 12/12


= 5,378,980 x 10% x 12/12
= 531,688

3. How much is the Carrying Value of Notes Receivable on Dec. 31, 2020? See amortization table!

Face Value, 12/31/20 5,000,000


Premium on N/R, 12/31/20 316,878
(378,980 – 62,102)
CV of Notes Receivable, 12/31/20 5,316,878

4. How much is the Current and Noncurrent Portion of Notes Receivable on Dec. 31, 2020?

Current Portion = 0

Noncurrent Portion = CV of N/R (12/31/20)

= 5,316,878

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