Reference no: EM132791651

Problem - The balance of the Notes Receivable of your client, Odetting Company, as of December 31, 2016 is P12,000,000. You were able to gather the following information regarding its composition:

a. P5,000,000 pertains to a 5-year promissory note, 10%, issued by A-Counting Inc. The note was issued on April 2, 2015 and pays interest every March 31. The entry made by the entity upon receiving the note included a debit to Notes Receivable and a credit to Cash for PSM. Accruals were never provided, but an entry was prepared for the interest collection on March 31, 2016 which includes a debit to Cash and a credit to Interest Income for P500,000.

b. A P4,000,000 3-year non-interest-bearing note was received by the entity on July 2, 2016 upon selling one of its machineries. The cost of the machinery is P9,000,000 with a 10-year useful life; no salvage value. The carrying value of the said machinery on December 31, 2015 is P3,600,000. The entry provided by the entity upon selling the machinery is as follows:

Notes Receivable 4,000,000

Accumulated Depreciation 5,400,000

Machinery 9,000,000

Gain on Disposal 400,000

The prevailing market rate on that date is 9%. The present value factor of 1 at 9% for 3 years is 0.7722; and the present value factor of an ordinary annuity of 1 at 9% for 3 years is 2.5313. No other entry was made for the remainder of the year related to the notes.

c. P2,000,000 pertains to a 5-year, 11% note, received on January 2, 2015. The actual amount received by the issuer of the note is only P1,990,000. Odetting incurred origination costs amounting to P85,776. The effective yield resulting from the transaction is 10%. The following entry was made by the entity on January 2, 2015:

Notes Receivable 2,000,000

Other Expense 85,776

Cash 2,075,776

Interest Income 10,000

The entry provided every interest collection on December 31 is a debit to Cash and a credit to Interest Income for P220,000.

d. P1,000,000 pertains to an investment in 8-Liver Company shares which are held for trading. The entity acquired the shares on November 5, 2016 and was erroneously debited to Notes Receivable. The fair value of the said shares on December 31, 2016 is P1,050,000. No other entry pertaining to the investment was made during the year.

Required -

1. How much is the overstatement/understatement of the net income for 2016?

2. What is the carrying value of the notes receivable on December 31, 2016?