Question

On 1 January 20X9, a borrower signed a long-term note, face amount, $2,150,000; time to maturity, three years; stated rate of interest, 2%. The effective rate of interest of 6% determined the cash received by the borrower. The principal of the note will be paid at maturity; stated interest is due at the end of each year. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:
1. Compute the cash received by the borrower. (Round time value factor to 5 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)

2. Give the required entries for the borrower for each of the three years. Use the effective interest method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations and final answers to the nearest dollar amount.)

Answer 1

	Face amount	$2150000
	Effective int rate	6%
	Stated int rate	2%
1	Cash received by the borrower
	=	Face amount*100/106*100/106*100/106
	=	2150000*100/106*100/106*100/106
	=	1,805,181
2
	Workings
	Schedule for liability
	Opening	Finance cost	Closing bal
Year 1	1,805,181	108,311	1,913,492
Year 2	1,913,492	114,810	2,028,302
Year 3	2,028,302	121,698	2,150,000
Entries
			$	$
S.No.	Date	Acconunt	Debit	Credit
1	01/01/2009	Cash	1,805,181
		To Long term note		1,805,181
2	31/12/2009	Finance cost	108,311
		To Long term note		108,311
3	31/12/2009	Interest (2%)	43,000
		To Bank		43,000
4	31/12/2010	Finance cost	114,810
		To Long term note		114,810
5	31/12/2010	Interest (2%)	43,000
		To Bank		43,000
6	31/12/2011	Finance cost	121,698
		To Long term note		121,698
7	31/12/2011	Interest (2%)	43,000
		To Bank		43,000
8	31/12/2011	Long term mote	2,150,000
		To Bank		2,150,000