On January 1, 2018, ABC rendered services to Smith Corporation and accepted a $2

Question

On January 1, 2018, ABC rendered services to Smith Corporation and accepted a $200,000 note. In exchange, Smith agreed to make (5) annual payments of P&I with the first payment to be made on December 31, 2018. An interest rate of 8% is imputed.

Part A. Determine the amount of (1) PMT of P&I

Part B. What amount of Service Revenue should ABC recognize on January 1, 2018?

Part C. What amount of Interest Revenue should ABC recognize on this note for the year ending December 31, 2019?

Part D. What is the Carrying Value of the Note Receivable at December 31, 2019?

This problem makes no sense to me how would I do it?

Periods 35910 496 69% 86 96 PV of $1 .89 82 70 .68 84 .74 .59 56 .79 68 .50 46 .// .f?.46 A2 Present Value of an Ordinary Annuity 69% 86 96 2.77 4.45 7.43 8.11 2.67 4.21 6.80 7.36 2.57 3.99 6.25 6.71 2.53 3.89 5.99 6.41

Explanation / Answer

Part-A: Amount of PMT

Present Value of Lability due to ABC = 200,000

Number of Annual Payments = 5

Interest Rate = 8%

Present value of an ordinary annuity table shows that present value annual payments of $1 for 5 years at 8% interest rate results into $3.99. Thus the annual payments required to have present value of $200,000.

= 200,000/3.99 = $50,125.3

Part-B: Amount of Service Revenue

As the services are provided in 2018 and payment is deferred, all amount due on services will be recognised as revenue

Part-C; Interest to be recognised for year ending Dec. 31, 2019

Annual Payment

Year

Total Amount Due (A)

Total

(B= C+D)

Interest

(C)

Principle (D)

Balance (A-D)

2018

200000

50125

16000

34125

165875

2019

165875

50125

13270

36855

129020

(Note: Interest expenses is calculated using opening balance of notes receivables * rate of interest. Like for 2018 = 200,000*8% = 16,000)

Interest in 2009 = $13,270

Part-D: Carrying Value of notes Receivables at Dec. 31, 2019

= 129,020

Date Accounts Debit Credit Jan 1, 2018 Notes Receivables 2,00,000       To Services Revenue 2,00,000

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