On January 1, 2018, ABC rendered services in exchange for a $100,000, 3 year, 4%
ID: 2398939 • Letter: O
Question
On January 1, 2018, ABC rendered services in exchange for a $100,000, 3 year, 4% note receivable. Interest is to be paid each December 31st and principal will be remitted at maturity. The customer's normal borrowing rate is 8%.
Part A. Determine the amount of Service Revenue ABC can recognize on Jan 1, 2018
Part B. Determine the carrying value of the note at December 31, 2019:
Part C. Determine the Total Interest Revenue ABC will recognize over the entire 3-year lending agreement.
What do I need to do to solve this problem?
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
A) Service Revenue should recognize = coupon * A/f(8%,3) + Par value * f/f(8%,3) = 100000*4%*2.57+100000*0.79
= 10280 +79000 = 89280
For part B & C, we have to get:
Amortisation schedule :
B) The carrying value of the note at Dec 31, 2019 = $95816 ( as shown in above table)
C) Total interest Revenue over the entire 3-year lending agreement is $22720. ( as shown in above table)
Date Cash payment Interest booked(8%of carrying value) Discount amortised Carrying value 1/1/18 89280 31/12/18 4000 7142 3142 92422 31/12/19 4000 7394 3394 95816 31/12/20 4000 8184 4184 100000 12000 22720 10720