Question

On November 1, 2021, Quantum Technology, a geothermal energy supplier, borrowed $17 million cash to fund a geological survey. The loan was made by Nevada BancCorp under a noncommitted short-term line of credit arrangement. Quantum issued a nine-month, 9% promissory note. Interest was payable at maturity. Quantum’s fiscal period is the calendar year.

Required:

1. Prepare the journal entry for the issuance of the note by Quantum Technology.

2. & 3. Prepare the appropriate adjusting entry for the note by Quantum on December 31, 2021 and journal entry for the payment of the note at maturity.

Record the issuance of the note by Quantum Technology.

Record the adjusting entry for the note by Quantum on December 31, 2021.

Record the payment of the note at maturity.

Complete the below table to calculate the price of a $1.6 million bond issue under each of the following independent assumptions (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1):

1. Maturity 13 years, interest paid annually, stated rate 9%, effective (market) rate 12%.

2. Maturity 10 years, interest paid semiannually, stated rate 9%, effective (market) rate 12%.

3. Maturity 6 years, interest paid semiannually, stated rate 11%, effective (market) rate 10%.

4. Maturity 10 years, interest paid semiannually, stated rate 11%, effective (market) rate 10%.

5. Maturity 10 years, interest paid semiannually, stated rate 10%, effective (market) rate 10%.

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2021. In payment for the $24.2 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%.(FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. & 2. Prepare the journal entries for LCD’s purchase of the components on November 1, 2021 and the first installment payment on November 30, 2021.

3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021?

Prepare the journal entries for LCD’s purchase of the components on November 1, 2021 and the first installment payment on November 30, 2021.

Record the purchase of the components.

Record the first installment payment.

What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021?

Answer 1

	Journal entries:
1	Date	Account titles					Debit	Credit
							($ in millions)
	Nov 1,2021	Cash					17
		Notes payable						17
		(Issuance of the note)
2	Dec 31,2021	Interest expense		(17*9%*2/12)			0.255
		Interest payable						0.255
		(Interest accured for Nov and Dec-2 months)
3	Aug 1,2022	Notes payable					17
		Interest expense		(17*9%*7/12)			0.8925
		Interest payable					0.255
		Cash						18.1475
		(Payment of the note at maturity)
	Price of a bond:
1	Price of a bond=Present value of face value+Present value of interest expense
	Discount factor=Market rate=12%
	Present value of face value=1.6 million*PV factor at 12% for 13th year=1.6*0.22917=$ 0.366672 million
	Interest expense=Face value*stated rate=1.6*9%=$ 0.144 million
	Present value of interest expense=0.144*PV annuity factor at 12% for 13 years=0.144*6.423548=$ 0.924991
	Price of a bond=0.366672+0.924991=$ 1.291663 million
2	Price of a bond=Present value of face value+Present value of interest expense
	Discount factor=Market rate for 6 months=12%*(6/12)=6%
	No.of semi-annual periods=10*2=20
	Present value of face value=1.6 million*PV factor at 6% for 20th year=1.6*0.311805=$ 0.498888 million
	Interest expense=Face value*stated rate=1.6*9%*6/12=$ 0.072 million
	Present value of interest expense=0.072*PV annuity factor at 6% for 20 years=0.072*11.46992=$ 0.825834
	Price of a bond=0.498888+0.825834=$ 1.3242722 million
3	Price of a bond=Present value of face value+Present value of interest expense
	Discount factor=Market rate for 6 months=10%*(6/12)=5%
	No.of semi-annual periods=6*2=12
	Present value of face value=1.6 million*PV factor at 5% for 12th year=1.6*0.556837=$ 0.890939 million
	Interest expense=Face value*stated rate=1.6*11%*6/12=$ 0.088 million
	Present value of interest expense=0.088*PV annuity factor at 5% for 12 years=0.088*8.863252=$ 0.779966
	Price of a bond=0.890939+0.779966=$ 1.670905 million
4	Price of a bond=Present value of face value+Present value of interest expense
	Discount factor=Market rate for 6 months=10%*(6/12)=5%
	No.of semi-annual periods=10*2=20
	Present value of face value=1.6 million*PV factor at 5% for 20th year=1.6*0.376889=$ 0.603022 million
	Interest expense=Face value*stated rate=1.6*11%*6/12=$ 0.088 million
	Present value of interest expense=0.088*PV annuity factor at 5% for 20 years=0.088*12.46221=$ 1.096674
	Price of a bond=0.603022+1.096674=$ 1.699696 million
5	Price of a bond=Present value of face value+Present value of interest expense
	Discount factor=Market rate for 6 months=10%*(6/12)=5%
	No.of semi-annual periods=10*2=20
	Present value of face value=1.6 million*PV factor at 5% for 20th year=1.6*0.376889=$ 0.603022 million
	Interest expense=Face value*stated rate=1.6*10%*6/12=$ 0.08 million
	Present value of interest expense=0.08*PV annuity factor at 5% for 20 years=0.08*12.46221=$ 0.996977
	Price of a bond=0.603022+0.996977=$ 1.599999 million=$ 1.6 million