Question 2 - UNIT 2 Ben Cleaners Inc. received a 10% $800,000 3-year note on January...

Question 2 - UNIT 2 Ben Cleaners Inc. received a 10% $800,000 3-year note on January 1, 2018 for services provided to Golden Crest Inn. Interest is paid semi-annually each Jul 1 and January 1. The market rate for similar notes is 8%. The financial year ends December 31.

Note: Use financial calculator and state all inputs and their values.

Required:

i) Discuss the nature of the note.

ii) Prepare the amortization schedule.

iii) Prepare all necessary journal entries for 2018.

Solutions

Expert Solution

Answer (i):

Face Value of Note = $800,000

Annual Stated Interest Rate = 10.00%
Semiannual Stated Interest Rate = 5.00%
Semiannual Stated Interest = 5.00% * $800,000
Semiannual Stated Interest = $40,000

Annual Market Interest Rate = 8.00%
Semiannual Market Interest Rate = 4.00%

Time to Maturity = 3 years
Semiannual Period = 6

Using financial calculator:
N = 6
I = 4.00%
PMT = 40000
FV = 800000

PV = -841937

Carrying Value of Note $841,937

Carrying value of note is higher than its face value; therefore it is a premium note.

Answer (ii):

Answer (iii):

ekkarill92 answered 1 year ago

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