On December 31, 2016, Ashton Corporation performed forensic psychic consultation

Question

On December 31, 2016, Ashton Corporation performed forensic psychic consultation services for the Edamame Private Detective Agency. Ashton was short of cash, and Ashton agreed to accept a $200,000 note receivable due December 31, 2018, bearing interest at 8% payable semi-annually. The market rate for a note of similar risk is 6%.

What interest rate would you use to compute the cash interest payment?

What interest rate would you use to compute the present value of the note?

Calculate the present value of the note receivable:

Provide the journal entry for the issue of the note receivable:

Explanation / Answer

The interest at the rate of 8% is paid as cash interest which is paid semiannually (8%/2). The present value of the note is calculated at the market rate of note of similar risk which is 3% (6%/2). The present value of the note receivable is as under: No. of payments(semianually for 2 years) 4 Market rate (6%/2) 3% Present value ($207,434.20) Payment of interest($200,000*8%)/2 $ 8,000 Face value $200,000 Present value Payment of interest semiannualy $8,000 Present value for 4 instalment @ 3% 3.7171 Present value of 4 instalments of interest $ 29,736.80 Face value $200,000 Present value of $1 at the end of 2nd year 0.8885 Present value of notes $177,700.00 Total present value of note $207,436.80 The journal entry for notes receivable is as under; 31st Dec. 2016 Notes Receivable $200,000 Accounts Receivable $200,000 (Being notes receivable issued by the customer)

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