Question
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) |
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