Question
In: Accounting
Ben Cleaners Inc. received a 10% $800,000 3-year note on January 1, 2018 for services provided...
Ben Cleaners Inc. received a 10% $800,000 3-year note on January
1, 2018 for services provided to Golden Crest Inn. Interest is paid
semi-annually each Jul 1 and January 1. The market rate for similar
notes is 8%. The financial year ends December 31.
Note: Use financial calculator and state all inputs and their
values.
Required:
i) Discuss the nature of the note.
ii) Prepare the amortization schedule.
iii) Prepare all necessary journal entries for 2018
Solutions
Expert Solution
1)
| Face Value of Note = $800,000 |
| Annual Stated Interest Rate = 10.00% |
| Semiannual Stated Interest Rate = 5.00% |
| Semiannual Stated Interest = 5.00% * $800,000 |
| Semiannual Stated Interest = $40,000 |
| Annual Market Interest Rate = 8.00% |
| Semiannual Market Interest Rate = 4.00% |
| Time to Maturity = 3 years |
| Semiannual Period = 6 |
| Using financial calculator: | |
| Nper | 6 |
| Rate | 4% |
| PMT | 40000 |
| FV | 800000 |
| =PV(A301,A300,A302,A303,0) | $841,937.09 |
| Carrying Value of Note $841,937 |
| Since Carrying value or present value of note is higher than face value of the note, it is a premium note |
2)
| Amortization Schedule | ||||||
| Year | Beginning Balance | Interest Expense | Installment Payment | Premium Amortized | Unamortized Premium | Ending Balance |
| 1/1/2018 | $ 41,937 | $ 841,937 | ||||
| 1/7/2018 | $ 841,937 | $ 33,677 | $ 40,000 | $ 6,323 | $ 35,614 | $ 835,614 |
| 1/1/2019 | $ 835,614 | $ 33,425 | $ 40,000 | $ 6,575 | $ 29,039 | $ 829,039 |
| 1/7/2019 | $ 829,039 | $ 33,162 | $ 40,000 | $ 6,838 | $ 22,201 | $ 822,201 |
| 1/1/2020 | $ 822,201 | $ 32,888 | $ 40,000 | $ 7,112 | $ 15,089 | $ 815,089 |
| 1/7/2020 | $ 815,089 | $ 32,604 | $ 40,000 | $ 7,396 | $ 7,692 | $ 807,692 |
| 1/1/2021 | $ 807,692 | $ 32,308 | $ 40,000 | $ 7,692 | $ (0) | $ 800,000 |
3)
| Journal Entries | |||
| Date | General Journal | Debit | Credit |
| 1/1/2018 | Notes Receivable | $ 841,937.00 | |
| Service Revenue | $ 841,937.00 | ||
| 1/7/2018 | Cash | $ 40,000.00 | |
| Notes Receivable | $ 6,322.52 | ||
| Interest Revenue | $ 33,677.48 | ||
| 1/12/2018 | Interest Receivable | $ 40,000.00 | |
| Notes Receivable | $ 6,575.00 | ||
| Interest Revenue | $ 33,425.00 | ||
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