On December 31, 2016, TTT Company finished consultation services and accepted in
ID: 2537611 • Letter: O
Question
On December 31, 2016, TTT Company finished consultation services and accepted in exchange a promissory note with a face value of $800,000, a due date of December 31, 2019, and a stated rate of 5%, with interest receivable at the end of each year.
The fair value of the services performed by TTT Company is not readily determinable and the note receivable is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
Management calculated the present value of the promissory note as follows:
Present value of interest = $40,000 × 2.48685 = $ 99,474
Present value of maturity value = $800,000 × .75132 = 601,056
$700,530
TTT Company uses the effective interest method.
Management rounds to the nearest dollar.
Any amount less than $10 is adjusted to Interest Expense at the end of the amortization period.
Prepare an amortization schedule in the table below.
Date
Cash Interest Paid
Effective Interest Expense
Discount Amortized
Unamortized Discount Balance
Present Value of Note Receivable
12/31/16
99,470
700,530
12/31/17
12/31/18
12/31/19
Total
Using the attached T-account template, prepare the entries to recognize the following transactions for TTT Company.
Date
Cash Interest Paid
Effective Interest Expense
Discount Amortized
Unamortized Discount Balance
Present Value of Note Receivable
12/31/16
99,470
700,530
12/31/17
12/31/18
12/31/19
Total
Explanation / Answer
Preparation of amortization schedule Date Cash interest paid [5% of $800000] Effective Interest expense [10% of beginning present value of note] Discount amortized Unamortized Discount Balance Present Value of Note Receivable A B C D=C-B E F 31/12/2016 $99,470.00 $700,530.00 31/12/2017 $40,000.00 $70,053.00 $30,053.00 $69,417.00 $730,583.00 31/12/2018 $40,000.00 $73,058.30 $33,058.30 $36,358.70 $763,641.30 31/12/2019 $40,000.00 $76,358.70 $36,358.70 $0.00 $800,000.00 Journal entries Date Account Titles Debit Credit 31/12/2016 Note receivable $800,000.00 Service Revenue $800,000.00 31/12/2017 Cash $40,000.00 Interest Revenue $40,000.00 31/12/2018 Cash $40,000.00 Interest Revenue $40,000.00 31/12/2019 Cash $840,000.00 Interest Revenue $40,000.00 Note receivable $800,000.00
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