Question

Chapter 7

Develop a response in either Word or Excel and follow the instructions outlined in the Assignments Menu for submission.

On December 31, 2010, Palli Company finished consultation services and accepted in exchange a promissory note with a face value of $240,000, a due date of December 31, 2013, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

         The following interest factors are provided:

                                                                                                    Interest Rate       

Table Factors for Three Periods                      5%                  10%

Future value of 1                                          1.15763             1.33100

Present value of 1                                          .86384               .75132

Future value of an ordinary annuity of 1 3.15250             3.31000

Present value of an ordinary annuity of 1 2.72325            2.48685

         REQUIRED

(a) Determine the present value of the note.

Prepare a Schedule of Note Discount Amortization using the effective interest method. (Round to whole dollars.)

Prepare the journal entry to record the acceptance of the note on December 31, 2010.

Prepare the journal entry to record the interest payment received on December 31, 2011

Answer 1

Answer a.

Value of Note Receivable = $240,000

Annual Interest Revenue = 5%*$240,000
Annual Interest Revenue = $12,000

Present Value of the Note = $12,000 * PVA of $1 (10%, 3) + $240,000 * PV of $1 (10%, 3)
Present Value of the Note = $12,000 * 2.48685 + $240,000 * 0.75132
Present Value of the Note =$210,159.00

Answer of Part b: