Question

Please Answer Part C: 1 & 2 .....

On December 31, 2006, Blue Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2009, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable, and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

A. Determine the present value of the note.  

Present Value of Face:    $600,000 x .75132 = $450,792                                                                    PVF: $450,792

Present Value of Interest: $600,000 x 5% = $30,000 x 2.48685 = $74,606                               PVI:   $74,606

Present Value of Face + Present Value of Interest = Present Value of Note                              PVN: $525,398

B. Prepare the Amortization Table for this note.

Date:	Interest Recognized (CV x ER x T)	Cash Interest (F x SR x T)	Discount Amortized (Column 1 – Column 2)	Unamortized Discount Balance (Face – PVN)	Carrying Value
	_______________	____________	_____________	600,000 -525,398 $ 74,602	$525,398
Dec.31 2007	525,398 x 10% = 52,540	30,000	52,540 – 30,000 = 22,540	74,602 – 22,540 = 52,062	600,000 – 52,062 = 547,938
Dec.31 2008	547,938 x 10% = 54,794	30,000	54,794 – 30,000 = 24,794	52,062 – 24,794 = 27,268	600,000 – 27,268 = 572,732
Dec.31 2009	572,732 x 10% = 57,273	30,000	57,273-30,000 = 27,268	0	600,000
	$164,607	$90,000	$74,607

                                * $5 adjustment to compensate for rounding.

C. Prepare the journal entries necessary on Blue Company’s books for the following dates:

1. December 31, 2006

2. December 31, 2009

Answer 1

Solution:

Journal Entries - Blue Company
Date	Particulars	Debit	Credit
31-Dec-06	Notes Receivables Dr	$525,398.00
	To Service Revenue		$525,398.00
	(Being note accepted on providing consulting service)
31-Dec-09	Interest receivables Dr	$30,000.00
	Notes Receivables Dr	$27,268.00
	To Interest Revenue		$57,268.00
	(Being interest revenue recorded)
31-Dec-09	Cash Dr	$630,000.00
	To Notes Receivables		$600,000.00
	To Interest receivables		$30,000.00
	(Being cash received against interest and notes)