Question

Problem Set B
You are the accountant for Madie Corporation, a manufacturer of jets.
On January 1, 2013 Madie Corporation sold a new Lear Jet to a customer, Animal, Inc.
Animal, Inc. did not have the cash upfront and therefore opted to issue a note to Madie Corporation as payment for the jet.
The note contained terms for Animal, Inc. (the customer) to pay interest semiannually on June 30 and December 31.
Portions of the amortization schedule appear below:
	Payment	Cash Interest Payment	Effective Interest	Discount or Premium Amortization	Carrying Value
					6,627,273
	1	320,000	331,364	11,364	6,638,637
	2	320,000	331,932	11,932	6,650,569
	3	320,000	332,528	12,528	6,663,097
	4	320,000	333,155	13,155	6,676,252
	5	320,000	333,813	13,813	6,690,065
	6	320,000	334,503	14,503	6,704,568
	-	-	-	-	-
	-	-	-	-	-
	-	-	-	-	-
	38	320,000	389,107	69,107	7,851,247
	39	320,000	392,562	72,562	7,923,809
	40	320,000	396,191	76,191	8,000,000
REQUIRED:
9.     Assuming Madie Corporation’s fiscal year end is September 30, do the adjusting journal entry for September 30, 2013.
10. If the customer repaid the note at 95 on January 1, 2016 (after the recording and payment of interest on December 31, 2015), would Madie record a gain or loss?

Answer 1

1. The following is the journal entry to be passed as at September 30:

Interest Receivable

Date	Account Titles & Explanations	Debit	Credit
Sep. 30	Interest Receivable	$160,000
	Discount Amortization	$5,966
	Interest Income		$165,966

2. If the note is repaid on January 1, 2016 at 95:

Cash received on settlement is 8,000,000 x 95% = $7,600,000

the following is the journal entry on settlement of the loan:

Date	Account Titles & Explanations	Debit	Credit
Jan. 1, 2016	Cash	$7,600,000
	Discount	$1,295,432
	Note Receivable		$8,000,000
	Gain on Settlement		$895,432