Question

Pancake Inc. agreed to loan Half Food Co. On 1/1/2020 (beginning of year 1), Half Food Co. gave a $ 36,000 zero interest-bearingnote due in 5 years to Pancake Inc. Assume that the market interest rate to discount the note is 9%.

Instructions:

1. Determine the present value of the zero-interest bearing note. You should use an appropriate factor (in five decimals) from a table in Ch. 6.  

__________________________     .                                                                                                

2. Record the journal entry Pancake (i.e. the lender) would make to record the receipt of the note on 1/1/2020. Do not provide journal entry from other dates or points will be deducted.

Date	Account title				Debit		Credit

c. Prepare an amortization schedule for the note using the effective interest method.

Year	Cash Interest	Interest revenue	Discount amortized	Carrying amount of note
Date of receipt
End of year 1
End of year 2
End of year 3
End of year 4
End of year 5

Answer 1

Answer:

a)

Present Value of Note = $36000*0.64993 (n=5,i=9%) =$23397.48

b)

Date	Particulars	Debit ($)	Credit ($)
1/1/2020	Note receivable	36,000
	Discount on note receivable		12,603
	Cash		23,397
	(To record receipt of note)

c)

Year	Cash Interest	Interest revenue	Discount amount	Carrying amount of note
Date of receipt				23,397
Year 1		2106	2106	25503
year 2		2295	2295	27798
Year 3		2502	2502	30300
Year 4		2727	2727	33027
Year 5		2972	2972	36000