On January 1, 2018, ABC rendered services to Smith Corporation and accepted a $2
ID: 2398928 • Letter: O
Question
On January 1, 2018, ABC rendered services to Smith Corporation and accepted a $200,000 note. In exchange, Smith agreed to make (5) annual payments of P&I with the first payment to be made on December 31, 2018. An interest rate of 8% is imputed.
Part A. Determine the amount of (1) PMT of P&I
Part B. What amount of Service Revenue should ABC recognize on January 1, 2018?
Part C. What amount of Interest Revenue should ABC recognize on this note for the year ending December 31, 2019?
Part D. What is the Carrying Value of the Note Receivable at December 31, 2019?
This problem makes no sense to me how would I do it?
Periods 35910 496 69% 86 96 PV of $1 .89 82 70 .68 84 .74 .59 56 .79 68 .50 46 .// .f?.46 A2 Present Value of an Ordinary Annuity 69% 86 96 2.77 4.45 7.43 8.11 2.67 4.21 6.80 7.36 2.57 3.99 6.25 6.71 2.53 3.89 5.99 6.41Explanation / Answer
Part-A: Amount of PMT
Present Value of Lability due to ABC = 200,000
Number of Annual Payments = 5
Interest Rate = 8%
Present value of an ordinary annuity table shows that present value annual payments of $1 for 5 years at 8% interest rate results into $3.99. Thus the annual payments required to have present value of $200,000.
= 200,000/3.99 = $50,125.3
Part-B: Amount of Service Revenue
As the services are provided in 2018 and payment is deferred, all amount due on services will be recognised as revenue
Part-C; Interest to be recognised for year ending Dec. 31, 2019
Annual Payment
Year
Total Amount Due (A)
Total
(B= C+D)
Interest
(C)
Principle (D)
Balance (A-D)
2018
200000
50125
16000
34125
165875
2019
165875
50125
13270
36855
129020
(Note: Interest expenses is calculated using opening balance of notes receivables * rate of interest. Like for 2018 = 200,000*8% = 16,000)
Interest in 2009 = $13,270
Part-D: Carrying Value of notes Receivables at Dec. 31, 2019
= 129,020
Date Accounts Debit Credit Jan 1, 2018 Notes Receivables 2,00,000 To Services Revenue 2,00,000