Problem Set B You are the accountant for Madie Corporation, a manufacturer of je

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Problem Set B You are the accountant for Madie Corporation, a manufacturer of jets. On January 1, 2013 Madie Corporation sold a new Lear Jet to a customer, Animal, Inc. Animal, Inc. did not have the cash upfront and therefore opted to issue a note to Madie Corporation as payment for the jet. The note contained terms for Animal, Inc. (the customer) to pay interest semiannually on June 30 and December 31. Portions of the amortization schedule appear below: Payment Cash Interest Payment Effective Interest Discount or Premium Amortization Carrying Value 6,627,273 1 320,000 331,364 11,364 6,638,637 2 320,000 331,932 11,932 6,650,569 3 320,000 332,528 12,528 6,663,097 4 320,000 333,155 13,155 6,676,252 5 320,000 333,813 13,813 6,690,065 6 320,000 334,503 14,503 6,704,568 - - - - - - - - - - - - - - - 38 320,000 389,107 69,107 7,851,247 39 320,000 392,562 72,562 7,923,809 40 320,000 396,191 76,191 8,000,000 REQUIRED: 9.     Assuming Madie Corporation’s fiscal year end is September 30, do the adjusting journal entry for September 30, 2013. 10. If the customer repaid the note at 95 on January 1, 2016 (after the recording and payment of interest on December 31, 2015), would Madie record a gain or loss? Problem Set B You are the accountant for Madie Corporation, a manufacturer of jets. On January 1, 2013 Madie Corporation sold a new Lear Jet to a customer, Animal, Inc. Animal, Inc. did not have the cash upfront and therefore opted to issue a note to Madie Corporation as payment for the jet. The note contained terms for Animal, Inc. (the customer) to pay interest semiannually on June 30 and December 31. Portions of the amortization schedule appear below: Payment Cash Interest Payment Effective Interest Discount or Premium Amortization Carrying Value 6,627,273 1 320,000 331,364 11,364 6,638,637 2 320,000 331,932 11,932 6,650,569 3 320,000 332,528 12,528 6,663,097 4 320,000 333,155 13,155 6,676,252 5 320,000 333,813 13,813 6,690,065 6 320,000 334,503 14,503 6,704,568 - - - - - - - - - - - - - - - 38 320,000 389,107 69,107 7,851,247 39 320,000 392,562 72,562 7,923,809 40 320,000 396,191 76,191 8,000,000 REQUIRED: 9.     Assuming Madie Corporation’s fiscal year end is September 30, do the adjusting journal entry for September 30, 2013. 10. If the customer repaid the note at 95 on January 1, 2016 (after the recording and payment of interest on December 31, 2015), would Madie record a gain or loss?

Explanation / Answer

1. The following is the journal entry to be passed as at September 30:

Interest Receivable

2. If the note is repaid on January 1, 2016 at 95:

Cash received on settlement is 8,000,000 x 95% = $7,600,000

the following is the journal entry on settlement of the loan:

Date Account Titles & Explanations Debit Credit Sep. 30 Interest Receivable $160,000 Discount Amortization $5,966    Interest Income $165,966

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