Question

Lainney Inc decides to offer its consulting services valued at $125,000 to Ari Inc. Ari pays $16,000 down and Lainney agrees to accept a three-year instalment note for the balance owing. Notes of similar risk charge interest at 11.51% The instalment note requires Ari to make three annual equal payments of $45,000. Each payment pays down part of the note’s principal and interest due to Lainney. Required: i. Prepare the entry on Lainney’s books to record the issuance of the note receivable ii. Using the effective interest method, set up an amortization table with the following headings to show the amount of interest revenue booked each period and the carrying value of the note receivable at the end of each period for Lainney. Period Cash Received Interest Revenue Payment on the Note Receivable Carrying value – Note receivable iii) Prepare the journal entry to record cash received, interest revenue and note repayments for each year. iv) Prepare a partial statement of financial position for Lainney at the end of Year 1 to show how the note would be presented. v) From Lainney’s perspective, what are the advantages of an installment note compared with a non-interest bearing long term note? Be specific. Do not use point form. Use proper sentence structure

Answer 1

Lainley Inc

Value of Consulting Service =$125,000

Down Payment =$16,000

Balance Payment =$109,000

So the PV of the annual Installment of $45,000 @11.51%

is $109,000

Ans i
Journal Entry
Account Title	Dr $	Cr $
Service Revenue		125,000
Cash	16,000
Notes Receivable	109,000

Ans ii
Amortization Table :	a	b	c	d	e
Year	Op Balance Note receivable	Annual Installment=Cash received	Interest Revenue =a*11.51%	Principal repaid=b-c	Note Receivable Carrying Value=a-d
1	109,000.0	45,000	12,545.90	32,454.10	76,545.90
2	76,545.90	45,000	8,810.43	36,189.57	40,356.33
3	40,356.33	45,000	4,645.01	40,354.99	1.35

	Ans iii
	Journal Entry
Date	Account Title	Dr $	Cr $
Year 1	Cash	45,000
	Interest Income		12,545.90
	Note Receivable		32,454.10
Year 2	Cash	45,000
	Interest Income		8,810.43
	Note Receivable		36,189.57
Year 3	Cash	45,000
	Interest Income		4,645.01
	Note Receivable		40,354.99

Ans iv
Lainley Inc
Partial Balance Sheet ,As on Year 1 end
Current Asset	Amt $
Current Portion of Note Receivable	36,189.57
Non Curremt Asset
Non Current portion of Note Receivable	40,356.3

Ans v.

The advantage od Installment Note receivable over non

interest beraing note is that , in Installment Notes the

Principal is repaid in every installment . That reduces the

overall exposure of interest and Principal due and also

reduces possible adverse impact of interest rate fluctuations

as the interest expense gradually comes down with progress

of time.