On December 31, 2016, Green Company finished consultation services and accepted
ID: 2574692 • Letter: O
Question
On December 31, 2016, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $550,000, 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 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%
QS) Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method.
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
Date 12/31/16 12/31/17 12/31/18 12/31/19 Cash Interest (5%) Effective Interest (10%) Discount Amortized Unamortized Discount Balance Present Value of Note 27500 27500 27500 82500Explanation / Answer
Present value of bond
Present value of interest ($550,000*5%*2.48685)
$68,388
Present value of MATURITY VALUE ($550,000*0.75132)
$413,226
Total Present value
$481,614
Schedule
Date
Cash interest 5%
Effective interest 10%
Discount amortised
Unamortised discount balance
Present value of note
(A)
(B) = previous bal of (E)*10%
(C) = (B-A)
(D) = previous bal of (D) - (C)
(E) = Previous Bal +(C)
31-Dec-16
$68,388
$481,614
31-Dec-17
27500
$48,161.44
$20,661.44
$47,726.94
$502,275.81
31-Dec-18
27500
$50,227.58
$22,727.58
$24,999.36
$525,003.39
31-Dec-19
27500
$52,500.34
$25,000.34
($0.98)
$550,003.73
Present value of bond
Present value of interest ($550,000*5%*2.48685)
$68,388
Present value of MATURITY VALUE ($550,000*0.75132)
$413,226
Total Present value
$481,614
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