Please Answer Part C: 1 & 2 ..... On December 31, 2006, Blue Company finished co
ID: 2521078 • Letter: P
Question
Please Answer Part C: 1 & 2 .....
On December 31, 2006, Blue Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2009, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services 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 10%.
A. Determine the present value of the note.
Present Value of Face: $600,000 x .75132 = $450,792 PVF: $450,792
Present Value of Interest: $600,000 x 5% = $30,000 x 2.48685 = $74,606 PVI: $74,606
Present Value of Face + Present Value of Interest = Present Value of Note PVN: $525,398
B. Prepare the Amortization Table for this note.
Date:
Interest Recognized
(CV x ER x T)
Cash Interest
(F x SR x T)
Discount Amortized
(Column 1 – Column 2)
Unamortized Discount Balance
(Face – PVN)
Carrying Value
_______________
____________
_____________
600,000
-525,398
$ 74,602
$525,398
Dec.31
2007
525,398 x 10% = 52,540
30,000
52,540 – 30,000 = 22,540
74,602 – 22,540 = 52,062
600,000 – 52,062 = 547,938
Dec.31
2008
547,938 x 10% = 54,794
30,000
54,794 – 30,000 = 24,794
52,062 – 24,794 = 27,268
600,000 – 27,268 = 572,732
Dec.31
2009
572,732 x 10% = 57,273
30,000
57,273-30,000 = 27,268
0
600,000
$164,607
$90,000
$74,607
* $5 adjustment to compensate for rounding.
C. Prepare the journal entries necessary on Blue Company’s books for the following dates:
1. December 31, 2006
2. December 31, 2009
Date:
Interest Recognized
(CV x ER x T)
Cash Interest
(F x SR x T)
Discount Amortized
(Column 1 – Column 2)
Unamortized Discount Balance
(Face – PVN)
Carrying Value
_______________
____________
_____________
600,000
-525,398
$ 74,602
$525,398
Dec.31
2007
525,398 x 10% = 52,540
30,000
52,540 – 30,000 = 22,540
74,602 – 22,540 = 52,062
600,000 – 52,062 = 547,938
Dec.31
2008
547,938 x 10% = 54,794
30,000
54,794 – 30,000 = 24,794
52,062 – 24,794 = 27,268
600,000 – 27,268 = 572,732
Dec.31
2009
572,732 x 10% = 57,273
30,000
57,273-30,000 = 27,268
0
600,000
$164,607
$90,000
$74,607
Explanation / Answer
Solution:
Journal Entries - Blue Company Date Particulars Debit Credit 31-Dec-06 Notes Receivables Dr $525,398.00 To Service Revenue $525,398.00 (Being note accepted on providing consulting service) 31-Dec-09 Interest receivables Dr $30,000.00 Notes Receivables Dr $27,268.00 To Interest Revenue $57,268.00 (Being interest revenue recorded) 31-Dec-09 Cash Dr $630,000.00 To Notes Receivables $600,000.00 To Interest receivables $30,000.00 (Being cash received against interest and notes)