Question

On January 1, 2019, Farmer Co. sold product to a customer in exchange for a four year $50,000 promissory note with an annual interest rate of 4%. Interest only payments are due SEMI-ANNUALLY, beginning on June 30, 2019. The market rate for an equivalent loan to this customer would have been 6%*. Farmer Co. uses IFRS, has a Dec 31 year end, and prepares adjusting entries annually.

Required: a) Calculate the amount of revenue to be recorded on January 1st 2019 by Farmer Co for the sale of the product.

i. Calculate using the present value tables in the textbook.

ii. Calculate using EXCEL “PV” formula. Copy your Excel formula to another cell as text so it can be viewed (put ‘ in front of it for text.) (Remember that the payment and the future value must be negative.)

b) Prepare the journal entries for Farmer Co. at Jan 1, 2019, June 30, 2019, and Dec 31, 2019. (Show all calculations.)

c) Prepare the note amortization schedule. Be sure to show the all the semi-annual interest payments and the payment of the note on Jan 1, 2023. *HINT: semi-annual payments, therefore, there is a payment every 6 months. Interest rates are always quoted on an annual basis.

Answer 1

Part 1

Number of semiannual period (4 years * 2)	8
Period	PV factor @3%
1	0.97087
2	0.94260
3	0.91514
4	0.88849
5	0.86261
6	0.83748
7	0.81309
8	0.78941
Total	7.01969
Cash interest (50000*4%*6/12)	$          1,000
Present value of interest (1000*7.01969)	$          7,020
Present value of principal (50000*0.78941)	$        39,471
Total present value	$        46,490

Part 2

Journal entries
Date	General Journal	Debit	Credit
Jan 1, 2019	Notes receivable	$        50,000
	Discount on notes receivable		$              3,510
	Sales Revenue		$            46,490
	To record Farmer Co. sold product to a customer in exchange for a four year $50,000 promissory note.
June 30, 2019	Cash	$          1,000
	Discount on notes receivable	$              395
	Interest revenue		$              1,395
	To record semiannual interest revenue on notes.
June 30, 2019	Cash	$          1,000
	Discount on notes receivable	$              407
	Interest revenue		$              1,407
	To record semiannual interest revenue on notes.

Part 3

Interest Receipt = $1,000

Interest Revenue = Previous period's carrying Value of Notes Receivable * 3%

Discount Amortization = Interest Revenue - Interest Receipt

Discount on Notes = Previous period's Discount on Notes - Discount Amortization

Carrying Value of Notes Receivable = $50,000 - Discount on Notes

Amortization schedule
Date	Interest Receipt	Interest Revenue	Discount Amortization	Discount on Notes	Carrying Value of Notes Receivable
Jan 1, 2019				$            3,510	$                 46,490
June 30, 2019	$               1,000	$          1,395	$                  395	$            3,115	$                 46,885
Dec 31, 2019	$               1,000	$          1,407	$                  407	$            2,709	$                 47,291
June 30, 2020	$               1,000	$          1,419	$                  419	$            2,290	$                 47,710
Dec 31, 2020	$               1,000	$          1,431	$                  431	$            1,859	$                 48,141
June 30, 2021	$               1,000	$          1,444	$                  444	$            1,414	$                 48,586
Dec 31, 2021	$               1,000	$          1,458	$                  458	$                957	$                 49,043
June 30, 2022	$               1,000	$          1,471	$                  471	$                485	$                 49,515
Dec 31, 2022	$               1,000	$          1,485	$                  485	$                  (0)	$                 50,000
Jan 1, 2023					$                           0