Question

MacWilliams Ltd. sold a $90,000 piece of machinery to a customer on 1 January 20X6, and took back a two year, 2% note receivable. The customer has to pay interest every 31 December, but the $90,000 principal is due only after two years. Market interest rates are 6%.

 

Required:

1. What is the present value of the note receivable?

2. Record the sale/loan on 1 January 20X6, the interest each 31 December (two times) and the loan repayment on 31 December 20X7. Use the gross method to record the note.

3. Record the transaction, interest, and repayment on the books of the customer.

Answer 1

Requirement 1

 

Present value:

       Maturity value $90,000 (P/F, 6%, 2)                       $80,100

       Interest $1,800 (P/A, 6%,2)                                          3,300

                                                                                           $83,400

 

Requirement 2

 

1 January 20x6

       Note receivable............................................................................... 90,000

               Discount on note receivable*.............................................................       6,600

               Sales revenue...................................................................................        83,400

       *$90,000 – $83,400

 

31 December 20x6

       Cash..................................................................................................  1,800

       Discount on note receivable............................................................ 3,204

               Interest revenue ($83,400 x 6%).....................................................          5,004

 

31 December 20x7

       Cash................................................................................................    91,800

       Discount on note receivable............................................................. 3,396

               Interest revenue ($83,400 + $3,204 = $86,604) x 6%.....................          5,196

               Note receivable..............................................................................           90,000

               

Requirement 3

 

1 January 20x6

       Machinery....................................................................................... 83,400

       Discount on note payable................................................................. 6,600

               Notes payable..................................................................................        90,000

       

31 December 20x6

       Interest expense ............................................................................... 5,004

               Discount on note payable................................................................          3,204

                           Cash..................................................................................             1,800

       

31 December 20x7

       Interest expense ............................................................................... 5,196

       Note payable................................................................................... 90,000

               Discount on note payable...............................................................          3,396

                           Cash .................................................................................          91,800