Question

On December 31, 2016, TTT Company finished consultation services and accepted in exchange a promissory note with a face value of $800,000, a due date of December 31, 2019, and a stated rate of 5%, with interest receivable at the end of each year.

The fair value of the services performed by TTT Company is not readily determinable and the note receivable is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

Management calculated the present value of the promissory note as follows:

Present value of interest                            =         $40,000 × 2.48685             =           $ 99,474

Present value of maturity value                =         $800,000 × .75132             =           601,056

                                                                                                                                             $700,530

TTT Company uses the effective interest method.

Management rounds to the nearest dollar.

Any amount less than $10 is adjusted to Interest Expense at the end of the amortization period.

Prepare an amortization schedule in the table below.

Date	Cash Interest Paid	Effective Interest Expense	Discount Amortized	Unamortized Discount Balance	Present Value of Note Receivable
12/31/16				99,470	700,530
12/31/17
12/31/18
12/31/19
Total

Using the attached T-account template, prepare the entries to recognize the following transactions for TTT Company.

Answer 1

Preparation of amortization schedule
Date	Cash interest paid [5% of $800000]	Effective Interest expense [10% of beginning present value of note]	Discount amortized	Unamortized Discount Balance	Present Value of Note Receivable
A	B	C	D=C-B	E	F
31/12/2016				$99,470.00	$700,530.00
31/12/2017	$40,000.00	$70,053.00	$30,053.00	$69,417.00	$730,583.00
31/12/2018	$40,000.00	$73,058.30	$33,058.30	$36,358.70	$763,641.30
31/12/2019	$40,000.00	$76,358.70	$36,358.70	$0.00	$800,000.00
Journal entries
Date	Account Titles		Debit	Credit
31/12/2016	Note receivable		$800,000.00
	Service Revenue			$800,000.00
31/12/2017	Cash		$40,000.00
	Interest Revenue			$40,000.00
31/12/2018	Cash		$40,000.00
	Interest Revenue			$40,000.00
31/12/2019	Cash		$840,000.00
	Interest Revenue			$40,000.00
	Note receivable			$800,000.00