Question

*DO NOT ROUND OFF ANY ANSWER UNTILL YOUR FINAL ANSWER. ROUND YOUR FINAL ANSWER TO THE NEAREST WHOLE DOLLAR*

Present value of an ordinary annuity

periods       3          5          9         10
4%               2.77    4.45    7.43    8.11
8%               2.57    3.99    6.25    6.71

On april 1,2020, ABC company rendered services to jones company in exchange for 3 year $400000 ,8% note. Payments of P&I (principal & interest) are due each april 1st, with the first payment due immediately. December 31st is the fiscal year end for ABC. Jones normal cost to borrow is 8%.

a) Determine the dollar amount of the cash payment of P&I to be remitted each april 1st.

b) Determine the total interest revenue that ABC will recognise on this note for the year end December 31, 2021.

c) Prepare partial balance sheet as of December 31 2020.

Current assets

Interest receivable   __________

Notes receivable( current maturity) __________

Long term investments

Notes receivable.       _________

#HINT:
PVAD = PVOA (1+ i)

Answer 1

a) $ amount of the cash payment of P&I to be remitted each April 1st.

Can be got by using the formula for present value of annuity due(beginning-of-year annuity)

ie. PVAD=PVOA*(1+i)

where, PVAD is given as $ 400000

PVOA= Annuity (P&I) pmt*Annuity factor, ie. Pmt*2.57   (P/A,i=8%,n=3)

i= 8% or 0.08 p.a.

so, 400000=Pmt*2.57*1.08

pmt.=400000/(2.57*1.08)=

144113

a) so,$ amount of the cash payment of P&I to be remitted each April 1st= $ 144113

Now, drawing the amortisation schedule

	Year	Annuity	Tow. Int. receivable	Tow. Note	Note balance
Apr.1,2020	0				400000
Apr.1,2020	1	144113	0	144113	255887
Apr.1,2021	2	144113	20471	123642	132245
Apr.1,2022	3	144113	10580	133533	-1288

Workings for b.
Interest revenue recognised for the yr. ended Dec 31, 2020	20470.96/12*9=	15353.22
Interest revenue recognised for the yr. ended Dec 31, 2021	20470.96/12*3=	5117.74
PLUS	10579.60/12*9=	7934.7
Total		13052.44
Interest revenue recognised for the yr. ended Dec 31, 2022	10579.60/12*3=	2644.9
Total interest on the NOTE		31050.56
So, reading from the above, yr.-wise interest recognition:
b) Total interest revenue that ABC will recognise on this note for the year end December 31, 2021=	13052.44

c) Partial balance sheet as of December 31 2020
Current assets
Interest receivable	15353
Notes receivable( current maturity)	123642
Long term investments
Notes receivable	132245
(400000-144113-123642)