ACC 106 MIDTERM EXAMINATION

Read the following questions carefully. Choose the best option and reflect your answers using your scantron sheets.
Erasure is discouraged. Answer the following questions to the best of your ability upholding the highest form of
integrity.

1. Spongebob Squarepants lent ₱2,000 to Squidward for one year at 10% interest, all due at maturity. He
Insisted The terms of the transaction be formalized in promissory note. In this situation
a. The maturity value of the note is ₱2,000.
b. Spongebob Squarepants is considered the maker of the note and records the note as an asset in his
accounting records.
c. Spongebob Squarepants is considered the maker of the note and records the note as a liability in his
accounting records.
d. Squidward is considered the maker of the note and records the note as a liability in his accounting
records.

2. Scott Company received a one-year non-interest-bearing note receivable. When the note receivable is
recorded, which of the following were debited or credited?
Interest Receivable Discount on Note Receivable
a. Yes Yes
b. Yes No
c. No Yes
d. No No

3. The periodic cash flows from a debt instrument may be computed by

a. multiplying the future cash flows from the note by an appropriate present value factor.
b. dividing the initial carrying amount by an appropriate present value factor.
c. adding together the periodic interest income and the amortization.
d. dividing the face amount by the life of the instrument.

4. On May 1, 2004 a company purchased a new machine which it does not have to pay for until May 1, 2006.
The total payment on May 1, 2006 will include both principal and interest. Assuming interest at a 10%rate, the
cost of the machine would be the total payment multiplied by what time value of money factor?
a. Future value of annuity of 1
b. Future value of 1
c. Present value of annuity of 1
d. Present value of 1

5. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e., similar
remaining maturity, cash flow pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through the
expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of
the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.

6. Which of the following is true regarding non-interest bearing note receivables?

a. they are always discounted to their present value on initial recognition
b. they include a specified principal amount but an unspecified interest amount
c. they include a specified principal and specified interest
d. they cause no interest income to be recognized over their term
e. they include an unspecified principal and an unspecified interest

7. A company received two one-year notes in payment for merchandise sold. One note has a face amount of
₱6,000and was interest-bearing at an annual rate of 18 percent. The other note has a face amount of ₱7,080
andis non interest-bearing (its implied interest rate was 18 percent)
a. The total amount of cash ultimately to be received will be more for the interest-bearing note.
b. Both notes will cause the same total interest to be recognized.
c. The amount of interest revenue which should be recognized is more for the interest-bearing note.
 d. The amount which should be credited to sales revenue is more for the noninterest-bearing note

8. On July 1, 2002, Cornell Corp. received a 3-year note with a face value of ₱1,000,000 and a stated interest
rate 10% percent in exchange for a machine with a fair value of ₱1,200,000. The present value of this note on
July 1, 2002 is 711,780. Compute the effective interest rate for Cornell Corp.
a. 16.67 percent
b. 15.0 percent
c. 12.0 percent
d. 11.11percent

Use the following information for the next two questions:

9. On January 1, 20x1, Emmanuel 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.
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

10. 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

Use the following information for the next two questions:

On January 1, 20x1, Alexis Co. sold machinery with historical cost of ₱3,000,000 and accumulated
depreciation of ₱900,000in exchange for a 3-year, ₱2,100,000 noninterest-bearing note receivable
due in equal semi-annual payments everyJuly1and 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

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 December 31, 2018, April Co. sold used equipment and received noninterest bearing note requiring
payment of 500,000 annually for ten years. The first payment is due Dec. 31, 2019 and the prevailing
interest rate for this type of note at date of issuance is 12%. Present value factors are as follows:
● 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

What amount is the carrying amount of the note receivable on Dec. 31, 2018?
a. 2,825,000
b. 2,175,000
c. 1,610,000
d. 5,000,000

14. How much is unearned interest income on Dec. 31, 2018?

a. 2,825,000
b. 2,175,000
c. 3,390,000
d. 0
15. Rebekha Co. sold machinery to Christine Co. On Jan. 1, 2019 for which the cash selling price was
P7,582,000. Christine entered into an installment sale contract with Rebekha at an interest rate of
10%. The contract required payments of 2,000,000 a year over five years with the first payment on
Dec. 31, 2019. What amount of interest should be included in Rebekha’s 2020 income statement
using the interest method?
a. 1,000,000
b. 758,200
c. 634,020
d. 0

16. 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

17. 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

18. What factor should you use for a ₱1,000 note receivable that is collectible in five annual instalments 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

19. 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

20. 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.

21. An entity sells goods either on a cash basis or on a 6-month instalment basis. On January 1, 20x1, goods
with a cash price of ₱50,000 were sold at an instalment 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 instalment price is recognized as interest
income on the date of sale.
d. Net receivable of ₱50,000 is recognized on the date of sale.

22. 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, Alex 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%.
23. How much is the interest income in 20x1?
a. 68,331
b. 76,532
c. 85,714
d. 96,000

24. 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

25. On December 1, 2022, Nadine Company gave Tommy Company a P2,000,000, 12% loan. Nadine
Company paid proceeds of P1,940,000 after the deduction of a P60,000 nonrefundable loan
origination fee. Principal and interest are due in sixty monthly installments of P44,500, beginning
January 1, 2023. The repayments yield an effective interest rate of 12% at a present value of
P2,000,000 and 13.4% at a present value of P1,940,000. What amount should Nadine report as
accrued interest receivable on December 31, 2022?
a. 19,400
b. 22,333
c. 20,000
d. 21,663

26. On January 1, 2016, Gem Company sold a machine with a carrying amount of P300,000 and
accepted in exchange a promissory note with a face value of P500,000, a due date of December 31,
2025, and a stated rate of 4%, with interest receivable at the end of each year. The fair value of the
machine is not readily determinable and the note is not readily marketable. Under the circumstances,
the note is considered to have an appropriate imputed rate of interest of 8%. The interest income to
be recognized in 2021 is
a. P20,000
b. P29,264
c. P32,604
d. P33,612

27. Caring Bank granted a loan to a borrower on Jan. 1, 2021. The interest rate on the loan is 10% payable
annually starting Dec. 31, 2021. The loan matures in five years. The data related to the loan are:
Principal amount P4,000,000
Direct loan origination cost 61,520
Indirect loan origination cost 26,400
Origination fees received from borrower 350,000
Fees received from borrower for
servicing the loan 15,000
How much is the net amount to be recognized in Caring Bank’s 2021 profit or loss related to this loan?

a. P445,382
b. P433,982
c. P428,600
d. P418,982

28. 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.

29. 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

30. A higher interest rate results to

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

31. The present value of 1 for a period of zero equals

a. 1.
b. 0.
c. Error!
d. Answer depends on the interest rate

32. 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.

33. An entity determines that the credit risk on a loan receivable has not increased significantly since initial
recognition. The entity should recognize loss allowance equal to
a. the 12-month expected credit losses on the instrument.
b. the lifetime expected credit losses on the instrument.
c. sum of a and b
d. none; credit losses should be recognized only when there is objective evidence of a loss event.

34. According to PFRS 9, it refers to the expected credit losses that result from all possible default events over the
expected life of a financial instrument.
a. 12-month expected credit losses
b. Lifetime expected credit losses
c. Loss allowance
d. Absolute loss

35. Interest income is computed on the net carrying amount (i.e., gross carrying amount less loss allowance) of an
instrument that is under which stage of the ‘three-bucket’ approach of PFRS 9’s expected credit loss model?
a. Stage 1
b. Stage 2
c. Stage 3
d. Stage 4

36. Which of the following most likely does not result to the derecognition of a financial asset?
a. The contractual rights to the cash flows from the financial asset expire.
b. The creditor cancels the financial asset.
c. The cash flows from the financial asset become uncollectible because of loss events.
d. The entity transfers the contractual rights to receive the cash flows of the financial asset but retains the
obligation to repurchase the financial asset at a future date.
 37. On January 1, 20x1, ABC Bank extended a 12%, ₱1,000,000 loan to XYZ, Inc. Principal is due on January 1,
20x5 but interests are due annually every January 1. ABC Bank incurred direct loan origination costs of
₱88,394 and indirect loan origination costs of ₱18,000. In addition, ABC Bank charged XYZ a 2.5-point
nonrefundable loan origination fee. How much is the interest income in 20x2?
a. 104,973
b. 105,364
c. 106,339
d. 136,661

Use the following information for the next three (3) questions:

An entity factored P6,000,000 of accounts receivable to a finance entity at the end of the current year.
Control was surrendered by an entity. The transaction met the criteria to be accounted for as sale but
subject to recourse for nonpayment. The fair value of the recourse obligation is P250,000.
The factor assessed a fee of 3% and retained a holdback equal to 5% of accounts receivable. In addition,
the factor charged 15% interest computed on a weighted average time to maturity of the accounts
receivable of 54 days.

38. What amount was initially received from the factoring of accounts receivable?
a. 5,296,850 c. 5,476,850
b. 5,386,850 d. 5,556,850

39. What total amount should be recognized initially as loss on factoring?

a. 863,150 c. 180,000
b. 563,150 d. 430,000

40. If all accounts are collected, what amount should be reported as loss on factoring the accounts receivable?
a. 313,150 c. 433,150
b. 180,000 d. 613,150

Use the following information for the next three (3) questions:

An entity accepted from a customer a P4,000,000, 90-day, 12% interest-bearing note dated August 31,
2023. On September 30, 2023, the entity discounted the note with recourse at the Apex State Bank at
15%. The discounting with recourse is accounted for as a conditional sale with recognition of a
contingent liability.

41. What amount was received from the discounting of note receivable?
a. 4,017,000 c. 4,103,000
b. 4,120,000 d. 3,965,500

42. What is the loss on note receivable discounting?

a. 40,000 c. 17,000
b. 23,000 d. 20,000

43. If the discounting is secured borrowing, what is included in the journal entry to record the transaction?
a. Debit interest expense P23,000
b. Credit liability for note discounted P4,000,000.
c. Credit interest income P40,000
d. All of these are included in the journal entry

Use the following information for the next two (2) questions:

On April 1, 2023, an entity discounted with recourse a 9-month, 10% note dated January 1, 2023 with
face amount of P8,000,000. The bank discount rate is 12%. The discounting transaction is accounted for
as a conditional sale with recognition of contingent liability.
On October 1, 2023, the maker dishonored the note receivable. The entity paid the bank the maturity
value of the note plus protest fee of P50,000.
On December 31, 2023, the entity collected the dishonored note in full plus 12% annual interest on the
total amount due.
44. What amount was received from the note receivable discounting?
a. 8,084,000 c. 8,000,000
b. 8,600,000 d. 8,120,000

45. What amount should be recognized as loss on note receivable discounting?

a. 600,000 c. 116,000
b. 516,000 d. 400,000

-END OF EXAMINATION-
“The gap between where you are and where you want to be is growth.
And the thing called life which happens in between, is really, really beautiful.”

ANSWERS:

1 D 11. D 21. D 31. A 41. A

2 C 12. A 22. D 32. D 42. B
3 B 13. A 23. A 33. A 43 D
4 D 14. B 24. D 34. B 44. A
5 C 15. C 25. C 35. C 45. C
6 E 16. C 26. D 36. D
7 B 17. B 27. B 37. A
8 C 18. B 28. D 38. B
9 C 19. A 29. C 39. B
10 A 20. A 30. B 40. A