Problem Set B You are the accountant for Madie Corporation, a manufacturer of je

Question

Problem Set B You are the accountant for Madie Corporation, a manufacturer of jets. On January 1, 2013 Madie Corporation sold a new Lear Jet to a customer, Animal, Inc. Animal, Inc. did not have the cash upfront and therefore opted to issue a note to Madie Corporation as payment for the jet. The note contained terms for Animal, Inc. (the customer) to pay interest semiannually on June 30 and December 31. Portions of the amortization schedule appear below: Payment Cash Interest Payment Effective Interest Discount or Premium Amortization Carrying Value 6,627,273 1 320,000 331,364 11,364 6,638,637 2 320,000 331,932 11,932 6,650,569 3 320,000 332,528 12,528 6,663,097 4 320,000 333,155 13,155 6,676,252 5 320,000 333,813 13,813 6,690,065 6 320,000 334,503 14,503 6,704,568 - - - - - - - - - - - - - - - 38 320,000 389,107 69,107 7,851,247 39 320,000 392,562 72,562 7,923,809 40 320,000 396,191 76,191 8,000,000 REQUIRED: 1. What is the face value of the note? 2. What was the initial selling price of the Lear Jet? 3. Did the note indicate a premium or discount? Problem Set B You are the accountant for Madie Corporation, a manufacturer of jets. On January 1, 2013 Madie Corporation sold a new Lear Jet to a customer, Animal, Inc. Animal, Inc. did not have the cash upfront and therefore opted to issue a note to Madie Corporation as payment for the jet. The note contained terms for Animal, Inc. (the customer) to pay interest semiannually on June 30 and December 31. Portions of the amortization schedule appear below: Payment Cash Interest Payment Effective Interest Discount or Premium Amortization Carrying Value 6,627,273 1 320,000 331,364 11,364 6,638,637 2 320,000 331,932 11,932 6,650,569 3 320,000 332,528 12,528 6,663,097 4 320,000 333,155 13,155 6,676,252 5 320,000 333,813 13,813 6,690,065 6 320,000 334,503 14,503 6,704,568 - - - - - - - - - - - - - - - 38 320,000 389,107 69,107 7,851,247 39 320,000 392,562 72,562 7,923,809 40 320,000 396,191 76,191 8,000,000 REQUIRED: 1. What is the face value of the note? 2. What was the initial selling price of the Lear Jet? 3. Did the note indicate a premium or discount?

Explanation / Answer

Solution 1:

Face value of note = Amount payable at maturity = $8,000,000

Solution 2:

Initial selling price of the Lear Jet = Present value of note = $6,627,273

Solution 3:

As note face value is $8,000,000 and it was issued at $6,627,273, it means note issued at discount.

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