In: Accounting
Concord Corporation, a publicly-traded company, agreed to loan
money to another company. On July 1, 2020, the company received a
five-year promissory note with a face value of $505,000, paying
interest at a face rate of 5% on July 1 each year. The note was
issued to yield an effective interest rate of 6%. Concord used the
effective interest method of amortization for discounts or
premiums, and the company’s year-end is September 30.
1. Use 1. PV.1 Tables, 2. a financial calculator, or 3. Excel functions to arrive at the amount to record the note receivable.
2. Prepare a schedule of note premium / discount amortization schedule
3. Prepare the journal entries to record the issue of the note on July 1, 2020, and any required accrual entries at the company’s year-end on September 30, 2020. Finally, prepare the journal entry to record the first cash collection received on July 1, 2021 for Concord Corporation.
1) Calculation of amount to record the note receivable:-
Note Receivable = Present Value of annual Interest+Present Value of Face Value of note
Annual Interest on note = Face Value of Note*Face rate
= $505,000*5% = $25,250
Present Value of annual interest = Annual Interest*PVAF(effective interest rate, no. of years)
= $25,250*PVAF(6%, 5 yrs)
= $25,250*4.21236 = $106,362
Present Value of Face Value = Face Value of note*PVF(6%, 5 yrs)
= $505,000*0.747258 = $377,365
Note Receivable Amount = $106,362+$377,365 = $483,727
Therefore the amount to record the note receivable is $483,727.
2) Total discount on note = Face Value - Issue Price of note
= $505,000 - $483,727 = $21,273
Discount Amortization Table is shown as follows:-
Date | Beg. Note balance (A) | Cash Received (B) | Interest Income (C = A*6%) | Discount Amortization (D = C-B) | Ending Note balance (A+D) |
07/01/20 | 0 | 0 | 0 | 0 | 483,727 |
07/01/21 | 483,727 | 25,250 | 29,024 | 3,774 | 487,501 |
07/01/22 | 487,501 | 25,250 | 29,250 | 4,000 | 491,501 |
07/01/23 | 491,501 | 25,250 | 29,490 | 4,240 | 495,741 |
07/01/24 | 495,741 | 25,250 | 29,744 | 4,494 | 500,235 |
07/01/25 | 500,235 | 25,250 | 30,014 | 4,765 (bal fig) | 505,000 |
3) The required journal entries is shown as follows:-
Journal Entries (Amounts in $)
Date | Account Titles and Explanation | Debit | Credit |
07/01/20 | Note Receivable | 505,000 | |
Discount on Note receivable (505,000-483,727) | 21,273 | ||
Cash | 483,727 | ||
(To record the issue of note receivable) | |||
09/30/20 | Interest Receivable | 6,313 | |
Discount on Note Receivable (7,256-6,313) | 943 | ||
Interest Revenue (483,727*6%*3/12) | 7,256 | ||
(To record the accrued interest) | |||
07/01/21 | Cash | 25,250 | |
Discount on Note receivable (3,774-943) | 2,831 | ||
Interest Revenue (29,024-7,256) | 21,768 | ||
Interest Receivable | 6,313 | ||
(To record the first cash collection) |