20. The journal entry to record the receipt of a non-interest bearing note in ex
ID: 2595353 • Letter: 2
Question
20. The journal entry to record the receipt of a non-interest bearing note in exchange for a good or service should include a: A. Debit to Note Receivable for an amount equal to the present value of the note. B. Debit to Note Receivable for the face value of the note (the amount to be received in the future). C. Debit to Discount on note receivable for the amount of interest to be earned on the note in the future. D. Credit to Discount on note receivable for the face value of the note receivable. E. None of the above. 21. Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activitics. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate of 7% (PV factor-0.8 1630). It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: Cash Outflow S 10 million S 30 million Probability 60% 40% The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is: A) $8.2 million. B) $14.7 million. C) $18 million. D) S30 million. 22. Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were: Book Value Fair Value Current assets (net) S 420,000 S 450,000 2,250,000 600,000 Property, plant,& equip. (net) 1,600,000 500,000 Liabilities Juliana would record goodwill of A) S1,180,000 B) 5600,000 C) $880,000. D) $100,000Explanation / Answer
20.
If a non interest bearing note is a bond, the issuer is selling the bond at a deep discount and committing to pay back the face value of the bond on its maturity date. This approach allows the issuer to avoid making periodic interest payments on the bond. Instead, all cash payment obligations by the issuer are concentrated at the maturity date of the bond.
The holder of a non interest bearing note should recognize imputed interest income on the instrument. This requires the following steps:
So correct option is (a)
Debit to note receivable for an amount equal to the present value of the note.
21.asset retirement obligation:
Present value of probable cash out flow
$10 million *60%*0.81630 =4.8978 million
$ 30 million *40%*0.81630=9.7956 million
Total = 14.7 Million
So Option (B) is correct answer.
22. Good will= fair Value of assets taken - purchase consideration
Fair Value of assets = $450000+2250000+600000= $33,00,000
Purchase consideration = $27,00,000
Good will = $33,00,000-27,00,000
Good will = $6,00,000.
Option (b) correct
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.