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 = A6%)**	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 (483,7276%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)

ekkarill92 answered 1 year ago

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