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NA Co. issued note receivable in January, 2017. The terms of the note are a two-year,...

NA Co. issued note receivable in January, 2017. The terms of the note are a two-year, $100,000, 10% interest rate. Assuming the market interest rate is 8% per annum and NA Co. use the effective interest method for an amortization, how much would NA Co. amortize discount (or premium) on the note receivable on the end of 2017? (The present value of $1 for one and two period at 8% is 0.92593 and 0.85734. The present value of $1 for one and two period at 10% is 0.90909 and 0.82645). Group of answer choices

Discount $1,818.

Premium $182.

Premium $1,715.

Discount $0.

Expert Solution

C) Premium $ 1,715 is the correct alternative.

Explanation :

Without even present value, you can solve this question .

Explanation :

Proceed on note receivable = Present value of principal + Present value of interest

Present value of principal = $ 100,000/(1+ r) ^t

where, r = market rate and t = time period

Here, r = 8% or 0.08 and t = 2

Present value of Principal = $100,000/ (1+ 0.08)²

Present value of Principal = $ 100,000/ 1.1664

Present value of Principal = 85,734

Present value of Interest = Annual interest X [ 1 - { 1/(1+r)^t} ] / r

Annual interest = $ 100,000 X 10% = $ 10,000

Present value of interest = $ 10,000 X [ 1 - { 1/(1+0.08)² } ] / 0.08 ]

Present value of interest = $10,000 X [ 1 - 1/1.1664 ] / 0.08

Present value of interest = $ 10,000 X [ 0.1664/1.1664 ] / 0.08

Present value of interest = $ 10,000 X 1.78326 = $ 17,833

Proceeds on note receivable = $ 85,734 + $ 17,833 = $ 103,567

Total amount of premium = Total Proceeds on note receivable issuance - Face amount of note receivable

Total amount of premium = $ 103,567 - $ 100,000 = $ 3,567

Amortization table :

Date	Cash paid (A)	Interest expense (B)	Amortization of premium (C) = A - B	Outstanding balance
Jan 2017				103,567
December 2017	10,000	8,285	1,715	101,852
December 2018	10,000	8,148	1,852	100,000

So, amortization of premium on December 2017 = $ 1,715

Note : Interest expense calculated by multiplying outstanding balance of notes with market rate of interest (8%)

December 2017 = $ 103,567 X 8% = $ 8,285

December 2018 = $ 101,852 X 8% = $ 8,148

Cash paid on note ( annually) = face amount of notes X coupon rate = $ 100,000 X 10% = $ 10,000.

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ekkarill92 answered 2 years ago

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