Question

Brown Co. agreed to loan Red Inc. On 1/1/2020 (beginning of year 1), Red gave a $ 86,000 zero interest-bearing note due in 5 years to Brown. Assume that the market interest rate to discount the note is 6%.

Instructions:

1. Determine the present value of the zero-interest bearing note. You should use an appropriate factor (five decimal places) from time value table(s) in Ch. 6.

    

   

   

                                                                                                         Answer:                                .                                     

2. Record the journal entry Brown (i.e. the lender) would make to record the receipt of the note on 1/1/2020. Do not provide journal entry from other dates or points will be deducted.

Date	Account title	Debit	Credit

3. Prepare an amortization schedule for the note using the effective interest method.

Year	Cash Interest	Interest revenue	Discount amortized	Carrying amount of note
Date of receipt
End of year 1
End of year 2
End of year 3
End of year 4
End of year 5

Answer 1

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Part a
Present Value of Note	$86,000*0.74726 (n=5,i=6%)	$                     64,264
Part b
Date	Account	Debit	Credit
1/1/2020	Note Receivable	$                     86,000
	Discount on Note receivable		$                             21,736
	Cash		$                             64,264
	(To record receipt of note)
Part c
Year	Cash Interest	Interest revenue	Discount amortized	Carrying amount of note
Date of receipt				$                                       64,264
End of year 1	$                                                                   -	$                        3,856	$                               3,856	$                                       68,120
End of year 2	$                                                                   -	$                        4,087	$                               4,087	$                                       72,207
End of year 3	$                                                                   -	$                        4,332	$                               4,332	$                                       76,540
End of year 4	$                                                                   -	$                        4,592	$                               4,592	$                                       81,132
End of year 5	$                                                                   -	$                        4,868	$                               4,868	$                                       86,000