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In: Accounting

On Jan 1st, 2014, Xena Inc. provided services in exchange for a 2-year $100,000, 8% note...

On Jan 1st, 2014, Xena Inc. provided services in exchange for a 2-year $100,000, 8% note receivable that pays interest quarterly on March 31st, June 30th , September 30th and Dec 31st. The customer’s normal borrowing rate (market rate) is 12%.

On, Jan 1st, 2014, the carrying value of the note receivable is $___________ Round to the nearest dollar

a.Prepare a well-labeled schedule (with debits/credits shown) for the journal entries through the life of the Note.

b.Prepare the original Journal Entry to record the issue of the Note Receivable

c.Prepare the Journal Entry to record the Interest on 12/31/15 for the Note Receivable

I am having a lot of trouble figuring this question out, it has been answered in the form of a table but I do not understand how it was done.

Solutions

Expert Solution

Face Value of note 100000
Quarterly interest payments 2000
Total Quarterly periods 8
Quarterly Market Interest Rate (12/4) 3%
On 1st Jan 2014, the carrying value of note * 92980

* Carrying value of note = 2000 * PVIFA (3%, 8 periods) + 100000 * PVF (3%, 8 years)

= 2000 * 7.0197 + 100000 * 0.7894

= 92980 (rounded off)

a.

Date Interest revenue Interest received Discount amortization Carrying value of note receivable
Jan 1,2014 92980
Mar 31,2014 2789 2000 789 93770
Jun 30,2014 2813 2000 813 94583
Sept 30,2014 2837 2000 837 95420
Dec 31,2014 2863 2000 863 96283
Mar 31,2015 2888 2000 888 97171
Jun 30,2015 2915 2000 915 98086
Sept 30,2015 2943 2000 943 99029
Dec 31,2015 2971 2000 971 100000

Interest revenue = Carrying value of note receivable (previous period) * 3%

Interest received = 100000 * 8% * (3/12) = 2000

Discount amortization = Interest revenue - Interest received

Carrying value of note receivable = Carrying value of note receivable (previous period) + Discount amortization

b.

Jan 1st,2014 Notes Receivable 100000
Discount on Notes Receivable 7020
Service revenue 92980
(to record the issue of notes receivable)

c.

Dec 31st,2015 Cash 2000
Discount on Notes Receivable 971
Service revenue 2971
(to record interest revenue)

ekkarill92 answered 1 year ago
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