Question

n December 31, 2017, Jones Builders Incorporated received a note receivable for stadium repairs provided to Lambeau Leap Company. The 4 year note had a face value of $400,000. The stated rate on the note was 9%. The market rate, at the time of issuance, for notes of this kind was 12%. Jones Builders correctly calculated the present value of the note to be $363,552.60. Interest on the note is paid annually, beginning December 31, 2018. The face value will be paid at maturity. Jones Builders uses the effective-interest method to amortize discounts and/or premiums.

1. Prepare the journal entry for Jones Builders for December 31, 2017. (Explanation not required)

2. What is the total amount of interest revenue related to this note that Jones Builders will record over the entire 4 year period?

3. What amount of interest revenue should Jones Builders record in 2019 related to this note?

Answer 1

Solution 1:

Journal Entries - Jones Builders
Date	Particulars	Debit	Credit
31-Dec-17	Note receivables Dr	$400,000.00
	To Cash		$363,552.60
	To Discount on note receivables		$36,447.40

Solution 2:

Note Amortization Schedule
Date	Cash Received	Interest revenue	Discount Amortized	Carrying value of Note
31-Dec-17				$363,552.60
31-Dec-18	$36,000.00	$43,626.31	$7,626.31	$371,178.91
31-Dec-19	$36,000.00	$44,541.47	$8,541.47	$379,720.38
31-Dec-20	$36,000.00	$45,566.45	$9,566.45	$389,286.83
31-Dec-21	$36,000.00	$46,713.17	$10,713.17	$400,000.00
Total		$180,447.40

amount of interest revenue related to this note that Jones Builders will record over the entire 4 year period = $180,447.40

Solution 3:

Amount of interest revenue should Jones Builders record in 2019 related to this note = $44,541.47