mpany accepted Smith Company\'s $50,000 3-year note, paying 1Opercent annually o

Question

mpany accepted Smith Company's $50,000 3-year note, paying 1Opercent annually on December 31, as full payment for a specialty piece of equipment. The market rate of interest for similar notes isT2 percent. The following data is provided: Table Factors for 3 Periods Interest Rate 10 percent 12 percent Future Value of $1 Present Value of $1 Future Value of an Ordinary Annuity of $1 Present Value of an Ordinary Annuity of $1 1.33100 40493 75 31000 2.48685 3.37440 2.40183 (a) (1) Determine the present value of the note (show calculations) and (2) make the appropriate journal entry for Harris Company on December 31, 2015. Round answers to the nearest dollar 5000 (so,.cooo). Soles (b) Make the appropriate entry for Harris Company on Decembe 2016! Round answers to the nearest dollar. (Show calculations.) (You may calculate the interest revenue and discount as we did in class, or by using an amortization table as shown in the text.) when 1st Interest payment received on 12/ In terest receirable 6oro soox 0-12)

Explanation / Answer

Solution 1a:

Present value of note = Present value of interest and principal discounted at 12%

= $5,000 * cumulative PV factor at 12% for 3 periods + $50,000 * PV Factor at 3 period for 12%

= $5,000 * 2.40183 + $50,000*0.71178 = $47,598

Solution 1b:

Journal Entries - Harris Company Date Particulars Debit Credit 31-Dec-15 Notes Receivables Dr $50,000.00            To Sales $47,598.00            To Discount on notes receivables $2,402.00 (Being equipment sold and notes received from buyer)

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