Pr. 7-163-Amortization of discount on note , Green On December 31, 2014 exchange

Question

Pr. 7-163-Amortization of discount on note , Green On December 31, 2014 exchange a promissory note with 31, 2014, Green Company finished consultation services and accepted in ss note with a face value of $600,000, a due date of December 31, 2017 and a stated rate of 5% services is not readily determinable and the note with interest receivable at the end of each year. The fair value of the determinable and the note is not readily marketable. Under the considered to have an appropriate imputed rate of interest of 10% circumstance aircumstances, the note is The following interest factors are provided: Interest Rate Table Factors For Three Periods Future Value of 1 Present Value of 1 Future Value of Ordinary Annuity of1 Present Value of Ordinary Annuity of 1 1.15763 86384 3.15250 2.72325 1.33100 75132 3.31000 2.48685

Explanation / Answer

Present Value for the first year ($525,398) is the total amount of money received by issuing bonds.

Effective interest rate is the market interest rate given in the question (10%). It is always calculated on the present value of the last year. (Dec. 2015 effective interest is calculated on Dec14 balance in Present value) (525,398 x 10% = 52,540)

The difference between the effective interest and cash interest (cash interest is always calculated on face value at stated rate = 5%) is discount amortized. This amount of discount amortized will be added to the present value of note every year. (525,398 + 22,540 = 547,938). Then in 2016, effective interest will be calculated on 2015 present value.

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