Question

In: Accounting

Concord Corporation, a publicly-traded company, agreed to loan money to another company. On July 1, 2020,...

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.

Solutions

Expert Solution

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)

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