Question

On January 1, 20x6, Cell Co. lends some money in exchange for a 10% $100,000 10-year note. The market rate for similar notes is 8%. Interest is received semiannually each July 1 and January 1. The financial year ends December 31. Round to the nearest whole number. (Hint: Prepare a partial amortization schedule to July 1, 20x8)

1. The present value of the note is :

2. The interest revenue to Cell Co. at December 31, 20x7 is:

3. The carrying amount of the note at July 1, 20x8 is :

Answer 1

Answer 1.

Face Value of Note = $100,000

Annual Interest Rate = 10%
Semiannual Interest Rate = 5%
Semiannual Interest = 5% * $100,000
Semiannual Interest = $5,000

Annual Market Rate = 8%
Semiannual Market Rate = 4%

Time to Maturity = 10 years
Semiannual Period = 20

PV of Note = $5,000 * PVIFA(4%, 20) + $100,000 * PVIF(4%, 20)
PV of Note = $5,000 * (1 - (1/1.04)^20) / 0.04 + $100,000 / 1.04^20
PV of Note = $113,590

Answer 2-3.

Interest Revenue at December 31, 20X7 is $4,525
Carrying Amount at July 1, 20X8 is $111,118