Question

On December 31, 2019, Vaughn Company finished consulting services and accepted in exchange a promissory note...

On December 31, 2019, Vaughn Company finished consulting services and accepted in exchange a promissory note with a face value of $545,000, a due date of December 31, 2022, and a stated rate of 6%, 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 12%. The following interest factors are provided: Interest Rate Table Factors For Three Periods 6% 12% Future Value of 1 1.19102 1.40493 Present Value of 1 0.83962 0.71178 Future Value of Ordinary Annuity of 1 3.18360 3.37440 Present Value of Ordinary Annuity of 1 2.67301 2.40183 (a) Your answer has been saved. See score details after the due date. Determine the present value of the note. (Round answers to 0 decimal places, e.g. 5,275.) Present value of the note $ 457593 Attempts: 1 of 1 used (b) Prepare a Schedule of Note Discount Amortization for Vaughn Company under the effective interest method. (Round answers to 0 decimal places, e.g. 5,275.) Date Cash Interest (6%) Effective Interest (12%) Discount Amortized Unamortized Discount Balance Present Value of Note 12/31/19 $ $ $ $ $ 12/31/20 12/31/21 12/31/22 $ $ $

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Answer #1

a) present value of interest = (545000×6%) ×2.40183   

=($32700×2.40183) =$78540

Present value of maturity value =$545000×0.71178

=$387920

78540+387920 = $466460

b) Vaughn company

Schedule of note Discount amortization for vaughn company
Effective interest method
6% Note discounted at 12%(Imputed)
Date

cash interest

(6%)

Effective interest

(12%)

 Discount amortized unamortized discount balance present value of note
12/31/2019 $78540 $466460
12/31/2020 $32700

$55975

(466460×12%)

$23275

(55975-32700)

$55265

(78540-23275)

$489735

(466460+23275)
12/31/2021 $32700

$58768

(489735×12%)

$26068

(58768-32700)

$29197

(55265-26068)

$515803

(489735+26068)
12/31/2022 $32700

$61897

(515803×12%)

$29197

(61897-32700)

$0

(29197-29197)

 $545000
$98100 $176640 $78540
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