Question

On December 21, 2018, Cuppie Cakes finished a large catering service and accepted in exchange a promissory note with a face value of $800,000, a due date of December 31, 2021, 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%.

The following interest factors are provided:

Interest Rate:

Table Factors For Three Periods: 5% 10%

Future Value of 1 1.15763 1.33100

Present Value of 1 .86384 .75132

Future Value of Ordinary Annuity of 1 3.15250 3.31000

Present Value of Ordinary Annuity of 1 2.72325 2.48685

Determine the present value of the note and prepare a Schedule of Note Discount Amortization for Cuppie Cakes under the effective interest method. Please explain as much as possible.

Answer #1

Present value of interest of $ 40,000 for three years (40000* Annuity factor ie.2.48685) | 99474 | ||||||||

Prsent value of maturity value ($800,000*PVF at 10% i.e. 0.75132) | 601056 | ||||||||

ISSUE PRICE | 700530 | ||||||||

Amortization table: | |||||||||

Date | Cash interest | Interest | Discount | Unamortized | Carrying value | ||||

Expense | Amortized | Discount | |||||||

Dec 31 2019 | 40000 | 70,053 | 30053 | 69,417 | 730,583 | ||||

Dec31 2020 | 40000 | 73058.3 | 33058.3 | 36,359 | 763,641 | ||||

Dec31 2021 | 40000 | 76364 | 36364 | 0 | 800,000 | ||||

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