On December 31, 2014, Green Company finished consultation services and accepted

Question

On December 31, 2014, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $710,000, a due date of December 31, 2017, 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 0.86384                0.75132

Future Value of Ordinary Annuity of 1 3.15250                3.31000

Present Value of Ordinary Annuity of 1    2.72325    2.48685

Determine the present value of the note. Present value of the note

Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method.

Date Cash Interest (5%) Effective Interest (10%) Discount Amortized Unamortized Discount Balance Present Value of Note 12/31/14 $ $ $ $ $ 12/31/15 12/31/16 12/31/17 $ $ $

Explanation / Answer

Part A)

The present value of note can be calculated with the use of following formula:

Present Value of Note = Annual Interest Amount*PVA(Imputed Interest Rate,Years) + Face Value*PV(Imputed Interest Rate,Years)

_________

Here, Annual Interest Amount = 710,000*5% = $35,500, Imputed Interest Rate = 10%, Face Value = $710,000 and Years = 3

Using these values in the above formula and Present Value factors provided in the question, we get,

Present Value of Note = 35,500*2.48685 + 710,000*.75132 = $621,720 (rounded off to whole dollars)

________

Part B)

The amortization schedule is given below:

Date Cash Interest (5%) Effective Interest (10%) Discount Amortized (Effective Interest - Cash Interest) Unamortized Discount Balance Present Value of Note 31 December 2014 88,280 (710,000 - 621,720) 621,720 31 December 2015 35,500 62,172 (10%*621,720) 26,672 61,608 (88,280 - 26,672) 648,392 (621,720 + 26,672) 31 December 2016 35,500 64,839 (10%*648,392) 29,339 32,269 (61,608 - 32,269) 677,731 (648,392 + 29,339) 31 December 2017 35,500 67,769 (10%*677,731 - 4 (for adjustment purposes)) 32,269 0 (32,269 - 32,269) 710,000 (677,731 + 32,269)

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