Reference no: EM132556030

Question -

Q1. On January 1, 2020, Jacobs Company sold property to Dains Company which originally cost Jacobs P950,000. There was no established exchange price for this property. Dains gave Jacobs a P1,500,000 zero-interest-bearing note payable in three equal annual installments of P500,000 with the first payment due December 31, 2020. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a P1,500,000 note payable in three equal annual installments of P500,000 at a 10% rate of interest is P1,243,500.

1. What is the amount of interest expense that should be recognized by Dains in 2020, using the effective interest method?

2. What is the amount of interest expense that should be recognized by Dains in 2021, using the effective interest method?

3. What is the carrying amount of the note payable on December 31, 2021?

Q2. On January 2, 2020, Lucy Corp. acquired a tract of land for P10,500,000. The company paid P2,500,000 down and signed a noninterest bearing note for the balance which is due on January 1, 2023. There was no established exchange price for the land and the note had no ready market. The prevailing interest for this type of note was 12%.

Round off present value factors to four decimal places.

4. How much is the interest expense for the year 2020?

5. What is the carrying value of the note payable on December 31, 2021?

Q3. Honey Company issued a 10% note payable for P7,200,000 on October 1, 2018. The note is payable in three equal annual payments of P2,400,000 plus accrued interest. The first interest and principal payment was made on October 1, 2019.

6. On June 30, 2020, what amount should be reported as accrued interest payable for this note?

Q4. At the beginning of 2020, XYZ Co. borrowed P1,800,000 from a bank evidenced by a noninterest bearing note due in three years. At the 12% effective interest rate for this type of loan, the present value of the note is P1,275,000 at the date of issuance.

7. How much is the interest expense for the year 2020?

8. What is the carrying value of the note on December 31, 2020?

9. How much is the interest expense for the year 2021?