On January 1, 2017, Windsor Company issued a $1,209,000, 5-year, zero-interest-b

Question

On January 1, 2017, Windsor Company issued a $1,209,000, 5-year, zero-interest-bearing note to Sheridan Bank. The note was issued to yield 10% annual interest. Unfortunately, during 2018 Windsor fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, Sheridan Bank decided that the loan was impaired. Windsor will probably pay back only $806,000 of the principal at maturity.

Assuming that both Windsor Company and Sheridan Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.

Explanation / Answer

Issue Price : PVF 10%,5 *Face value

             = .62092 * 1,209,000

                 = $ 750,692.28   [Rounded to 750,692]

Amortisation Table year Discount amortised carrying value at end 1 Jan 2017 750692     31 Dec 2017 750692*.10= 75069.2 75069.2+750692= 825761.2 2018 825761.2*.10= 82576.12 82576.12+825761.2= 908337.32 2019 908337.32*.10= 90833.73 90833.73+908337.32= 999171.05 2020 999171.05*.10= 99917.11 99917.11+999171.05= 1099088.16 2021 1099088.16*.1= 109911.84** adjusted for round off 1099088.16+109911.84= 1209000

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