On December 31, 2010, Palli Company finished consultation services and accepted

Question

On December 31, 2010, Palli Company finished consultation services and accepted in exchange a promissory note with a face value of $240,000, a due date of December 31, 2013, and a stated rate of 5%, 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 10%.

         The following interest factors are provided:

                                                                                                    Interest Rate      

Table Factors for Three Periods                    5%                  10%

Future value of 1                                           1.15763            1.33100

Present value of 1                                          .86384              .75132

Future value of an ordinary annuity of 1   3.15250            3.31000

Present value of an ordinary annuity of 1 2.72325            2.48685

         REQUIRED

A) Determine the present value of the note.

B) Prepare a Schedule of Note Discount Amortization using the effective interest method. (Round to whole dollars.)

C) Prepare the journal entry to record the acceptance of the note on December 31, 2010.

D) Prepare the journal entry to record the interest payment received on December 31, 2011

Explanation / Answer

Ans 1 Present Value of note $240000*PV(3,10%) 240000*0.75132 180316.8 Price of the Note = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Note= Present value of Interest payments+Present value of the note Price of Note (240000*.05)*(1-(1.10)^-3)/.10)+240000/(1.10)^3 12000*(1-.75132)/.10)+240000*.85132 210158.4 Ans 2 Date Interest @5% Effectve Interest at 10%*G Discount Amortization of Note C-B Unamortized discount Promissory Note Carrying value of Note F-E 12/31/2010 29842 240000 210158 12/31/2011 12000 21016 9016 20826 240000 219174 12/31/2012 12000 21917 9917 10908 240000 229092 12/31/2013 12000 22909 10909 -1 240000 240001 Ans 3 Dr Cr 31-Dec-10 Notes receivable $240,000 Service Revenue $210,158 Discount on Promissory Note $29,842 (Being promissory note issued against service performed and unamortized discount $29842 credited) 31-Dec-11 Cash 12000 Discount on Promissory Note 9016 Interest Revenue 21016 (Being interest received and discount amortized)

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