Question
In: Accounting
By October 31, 20X1, Watson Consulting Limited (WCL) had performed a significant amount of management consulting...
By October 31, 20X1, Watson Consulting Limited (WCL) had performed a significant amount of management consulting services for Keller Ltd (Keller). Keller was short of cash, and WCL agreed to accept a $200,000, non-interest-bearing two-year note due October 31, 20X3, from Keller as payment in full. WCL has a strong credit record and is able to obtain various lines of credit at 5%. Keller's creditworthiness is not as strong as WCL and recently had to pay 8% interest for money it borrowed from a major Canadian bank. WCL and Keller are both listed on the TSX and have a December 31 year end.
Required:
- Prepare an effective-interest amortization schedule for the promissory note received by WCL on October 31, 20X1 using Excel. Round all dollar amounts to the nearest dollar.
- Prepare all necessary journal and/or adjusting entries for WCL for the year ended December 31, 20X1 in relation to the note described above. Show supporting calculations. Round all dollar amounts to the nearest dollar.
- Prepare all necessary journal and/or adjusting entries for WCL for the year ended December 31, 20X2 in relation to the note described above. Show supporting calculations. Round all dollar amounts to the nearest dollar.
- Prepare all necessary journal and/or adjusting entries for WCL for the year ended December 31, 20X3 in relation to the note described above. Show supporting calculations. Round all dollar amounts to the nearest dollar.
Solutions
Expert Solution
A non-interset bearing bond is nothing but a discounted bond. thus the amount of note shall be the amount as calculated below.
face value of the note shall be $190476.19(200,000/1+.5)
amount of interest will be = $9523.81 this will be amortized over the life of the note that is 2 years.
first-year amortization = Nov to Dec = 2 months 9523.81/24*2= $793.65
second-year Jan to Dec = 12 months 9523.81/24*12= $4761.90
last dec to oct = 10 months 9523.81/24*10= $3968.26
note you can copy this in an excel sheet.
part two journal entries. 31st Oct:
| note receivable | $200,000 | |
| discount | $9523.81 |
| Keller | $190476.19 |
on 31st Dec 20x1
| particulars | debit | credit |
| discount | $793.65 | |
| interest income | $793.65 |
on 31st Dec 20x2
| particulars | debit | credit |
| discount | $4761.90 | |
| interest income | $4761.90 |
on 31st Oct 20x3
| particulars | debit | credit |
| discount | $3968.26 | |
| interest income | $3968.26 |
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