Question

On Jan 2, 2014, tumes company loaned cash to Nezre company and aceepted a 3 year, 5%, 20,000$ note receivable from the Nezre company. Nezre will pay interest annually to tumes company on decemebr 31st. and at the time of transaction occured, the market rate of interest for notes of similer risk was 6%

1: Calculate the present value of the note on Jan 2, 2014

2: Prepare the journal entry to recored the note reciveable

3: Prepare an amortization schdule using the effective interest method

Answer 1

1) PV of the note on Jan 2, 2014 = coupon * PVIFA(6%,3) + Par value * PVIF(6%,3)

= 20000 * 5% * PVIFA(6%,3) + 20000 * PVIF(6%,3) = 1000 * 2.673 + 20000 * 0.84 = 2673 + 16800 = 19473

2) JOURNAL ENTRY:

Debit Note Receivable $20000

Credit CAsh $19473

Credit Discount on Note receivable $527

3) amortization schdule using the effective interest method :

Date	Interest paid	Interest expense	amortised amount	Carrying amount $
2/1/2014				19473
31/12/14	20000*5%=1000	19473*6%=1168	+168	19641
31/12/15	20000*5%=1000	19641*6%=1178.5	+178	19819
31/12/2016	20000*5%=1000	19819 * 6% = 1189	+189	20008