TAKE-HOME PROBLEM SET #2: CHAPTERS 6 THROUGH 10 Page 7 of 20 Problem #2: Notes R

Question

TAKE-HOME PROBLEM SET #2: CHAPTERS 6 THROUGH 10 Page 7 of 20 Problem #2: Notes Receivable (26 points) On December 31, 2017, Green Company completed consulting services for a client, Jones & Co., and agreed to accept a promissory in exchange. The note had a face value of $600,000, due in full on December 31 2019 and bears interest at 5%, payable at the end of each year. The fair value of the services is not determinable and the note is not readily marketable. and Jones & Co. normally borrow at rates of 8% and 10%, respectively. Green Company Green Company received all required payments under the terms of the note Your Answer Compute the fair value of the transaction implied by the terms of the agreement. (6 points including inputs) a. Identify the inputs that you entered into your Financial Calculator OR the Excel formula (with amounts) that you used to compute the fair value. SUPPORTING CALCULATIONS using a Financial Calculator or Excel: EXCEL Formula I/Y PV PMT FV MODE Prepare the journal entry to record the receipt of the note by Green for its consulting services at December 31, 2017. (4 points) b. DATE ACCOUNT NAMES DEBIT CREDIT 5G2 LU

Explanation / Answer

Answer (a)

PV @ 8%

540123.5

567901.2

THE EFFECTIVE INTEREST RATE TO RECOGNISE INTEREST REVENUE SHOULD BE 8% i.e. THE BORROWING RATE OF GREEN COMPANY (THE COMPANY WHICH IS EARNING INTEREST REVENUE)

(b) JOURNAL ENTRY

DR. JONES & COMPANY A/C...................................567901

CR. REVENUE FROM SERVICES A/C.......................567901

(d) LOAN AMORTISATION SCHEDULE

567901

583333+46667-630000=0

660000

(e) JOURNAL ENTRY ON 31 DEC. 2018

DR. JONES & COMPANY A/C...............................45432

CR. REVENUE FROM INTEREST/INTEREST INCOME A/C...............45432

DR. BANK A/C..........................30000

CR. JONES & COMPANY A/C.................30000

(f) INTEREST REVENUE = 45432

CURRENT ASSETS

NOTES RECEIVABLE = 583333

YEARS CASH INFLOW

PV @ 8%

1 600000*5%= 30000 27777.78 2 600000*5%+600000=630000

540123.5

TOTAL

567901.2

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