On December 31, 2012, Spartan outdoors received a 3%, $100,000, 3 year note from

Question

On December 31, 2012, Spartan outdoors received a 3%, $100,000, 3 year note from a customer for services it rendered during 2012. The note pays interest annually and the market interest rate for notes of this kind was 10% at that time.

Instructions:
(1) Record the necessary journal entries on Dec. 31, 2012.
(2) Prepare a discount (or premium) amortization table that clearly shows the cash interest received, the interest revenue, the discount (or premium) amortized and the carrying (or Book) value of the note at the end of each year in the life of the note.
(3) Record all the necessary journal entries at the end of each year in the life of the note (i.e., Dec, 31, 2013, Dec. 31, 2014, and Dec. 31, 2015).

Explanation / Answer

(1) Record the necessary journal entries on Dec. 31, 2012.

Present Value of Notes Recievable = 3000*(1-(1+10%)^-3)/10% + 100000/(1+10%)^3

Present Value of Notes Recievable = $ 82,592.04

Discount on Notes Recievable = 100000 - 82592.04 = 17407.96

(2) Prepare a discount (or premium) amortization table that clearly shows the cash interest received, the interest revenue, the discount (or premium) amortized and the carrying (or Book) value of the note at the end of each year in the life of the note.

(3) Record all the necessary journal entries at the end of each year in the life of the note (i.e., Dec, 31, 2013, Dec. 31, 2014, and Dec. 31, 2015).

Date Account Title & Explaination Debit Credit December 31, 2012 Notes Recievable 100000 Discount on Notes Recievable 17407.96 Account Recievable 82592.04

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