Question

On December 31, 2019, Swifty Company finished consulting services and accepted in exchange a promissory note with a face value of $675,000, 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

Prepare a Schedule of Note Discount Amortization for Swifty 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
		$		$		$

Answer 1

Solution:

Present value of note = Present value of interest and face value

= ($675,000*6%) * Cumulative PV factor at 12% for 3 periods + $675,000 * PV factor at 12% for 3rd period

= $40,500 * 2.40183 + $675,000 * 0.71178

= $97,274 + $480,452

= $577,726

Date	Cash interest (6%)	Effective Interest(12%)	Discount Amortized	Unamortized discount balance	Present value of note
31-Dec-19				$97,274	$577,726
31-Dec-20	$40,500	$69,327	$28,827	$68,447	$606,553
31-Dec-21	$40,500	$72,786	$32,286	$36,161	$638,839
31-Dec-22	$40,500	$76,661	$36,161	$0	$675,000