Question

1. On January 1 2010, J Company lends M Company $20,000 with payment due in 5 years. J Company calculates that present value of the $20,000 is $13,612.

Required:

a) Prepare the journal entry for J Company on January 1, 2010.

b) Prepare an effective interest amortization table with 4 columns for J Company.

c) Prepare the journal entries for J Company on 31 December 2010, 2011, 2012, 2013, 2014 and 2015. Assume that M Companies repays J Company promptly. 2. Repeat all the requirements in question 1 above if the note has a stated rate of 6% per annum. 3. Repeat all the requirements in question 1 above if the note has a stated rate of 10% per annum.

Answer 1

As per policy, only one question is allowed to answer at a time, so accordingly answering Q1 here:

Q1)
through hit and trial method, the stated rate
of 8% per annum will provide Present Value
to $13612 of Maturity Amount $20000.
ie. 20000 * PVIF(8%,5) = 20000 * 0.6806 = 13612
a: Journal entry on Jan 1, 2010:
Date	Acc Title	Debit $	Credit $
1-Jan-10	Cash	13612
	Note payable		13612
	(being note issued with maturity 20000 at
	stated rate 8%)
b: Amortisation schedule:
Pd.	Amt amortised	Carring Value
Jan 1 10		13612
Dec 31 10	1089	14701
Dec 31 11	1176	15877
Dec 31 12	1270	17147
Dec 31 13	1372	18519
Dec 31 14	1482	20000
total	6388
c: Journal Entries:
Date	Acc Title	Debit $	Credit $
Dec 31 2010	Interest expense	1089
	Interest payable		1089
	(interest for the year made payable)
Dec 31 2011	Interest expense	1176
	Interest payable		1176
	(interest for the year made payable)
Dec 31 2012	Interest expense	1270
	Interest payable		1270
	(interest for the year made payable)
Dec 31 2013	Interest expense	1372
	Interest payable		1372
	(interest for the year made payable)
Dec 31 2014	Interest expense	1482
	Interest payable		1482
	(interest for the year made payable)
Jan 1 2015	Note payable	13612
	Interest payable	6388
	Cash		20000
	(note's principle and interest paid)

Similarly you can perform with stated rate 6% and 10% also.