Question

On January 1, 2019 Bowlen Inc. gave a loan to Atwater Corp. in return for a 4-year note receivable with a face value of 20,000 and a 5% stated interest rate. Interest payments are received annually on 12/31 and the note matures on December 31, 2022. The market rate for similar loans is 6%.
	Date	Cash Received	Interest Revenue	Disc/Prem Amortized	Carrying Amount
	1-Jan

Please prepare the necessary journal entries for Bowlen Inc. in 2019.

Please prepare the necessary journal entries for Bowlen Inc. in 2022.

Answer 1

Date	Cash Received	Interest Revenue	Disc/Prem Amortized	Carrying Amount
1/1/2019			$693	$19,307
12/31/2019	$1,000	$1,158	$158	$19,465
12/31/2020	$1,000	$1,168	$168	$19,633
12/31/2021	$1,000	$1,178	$178	$19,811
12/31/2022	$1,000	$1,189	$189	$20,000

• Cash received = $20,000 x 5% = $1,000
• Interest revenue = Preceding carrying amount x 6%
• Disc Amortized = Interest revenue - Cash received
• Carrying amount = Preceding carrying amount + Disc. Amortized

For 2019:

Date	Account title and explanation	Debit	Credit
1/1/2019	Notes receivable	$20,000
	Discount on notes receivable		$693
	Cash		$19,307
	[To record cash received from notes]
12/31/2019	Cash	$1,000
	Discount on notes receivable	$158
	Interest revenue		$1,158
	[To record interest received]

For 2022:

Date	Account title and explanation	Debit	Credit
12/31/2022	Cash	$1,000
	Discount on notes receivable	$189
	Interest revenue		$1,189
	[To record interest received]
12/31/2022	Cash	$20,000
	Notes receivable		$20,000
	[To record cash received at maturity]

.

Calculations:

Present value of Cash interest	$3,465
[$1,000 x 3.4651 PV annuity of $1 (6%, 4 Periods)]
Present value of Face value	$15,842
[$20,000 x 0.7921 PV of $1 (6%, 4 periods)]
Present value of Notes receivable	$19,307