Question

In: Accounting

On Jan 1, 2016, Zahid sold a truck to Othaim in exchange for a $200,000, 6%...

On Jan 1, 2016, Zahid sold a truck to Othaim in exchange for a $200,000, 6% (payable annually), 5 year, notes payable. On Jan 1, 2016, the market rate was 8%.

Date

Cash Received

Int. Revenue

Pre Amrt.

Carrying Value

1-Jan-16

1-Jan-17

1-Jan-18

1-Jan-19

1-Jan-20

1-Jan-21

Requirements:

(1)

What is the sale revenue that Zaid should recognize on Jan 1, 2016?

(2)

What is the interest revenue that Zaid should recognize on Dec 31, 2016?

(3)

What is the Pre Amrt. that Zaid should recognize on Dec 31, 2018?

(4)

What is the carrying value of the notes on Dec 31, 2019?

(5)

What is the interest receivable related to the notes on Dec 31, 2020?

Solutions

Expert Solution

Sales revenue=Carrying value at the beginning:
Cash received=Face value of interest*stated rate=200000*6%=$ 12000
Discount rate=market rate=8%
Life of the note=5 years
Present value of cash received=Cash received*Discount factor at 8% for 5 years=12000*3.99271=$ 47912.52
Present value of principal repayment of notes=maturity value*Discount factor at 8% for 5th year=200000*0.68058=$ 136116
Sales revenue=Carrying value at the beginning=47912.52+136116=$ 184028.52=$ 184029
Date Cash received Int. revenue Pre Amrt Carrying value
01-Jan-16 184029
01-Jan-17 12000 14722 2722 186751
01-Jan-18 12000 14940 2940 189691
01-Jan-19 12000 15175 3175 192867
01-Jan-20 12000 15429 3429 196296
01-Jan-21 12000 15704 3704 200000
Int. revenue=Beginning carrying value*market rate
Pre amrt=Int. revenue-Cash received
Ending carrying value=Beginning carrying value+Pre amrt
1 Sales revenue=$ 184029
2 Interest revenue on Dec 31,2016=$ 14722
3 Pre amrt on Dec 31,2018=$ 3175
4 Carrying value as on Dec 31,2019=$ 192867 (carrying value changes on Jan 1)
5 Interest receivable on Dec 31,2020=$ 15704

ekkarill92 answered 1 year ago
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