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