Question

On July 1, 2020, Stealth Company sold a machine (classified as inventory) that had a list price of $57,600. The customer paid $9,600 cash and signed a three-year, $48,000 note that specified a stated interest rate of 5%. Annual interest on the full amount of the principal is payable each June 30. The principal is payable on June 30, 2023. The market rate of interest for a note of this risk is 8%. Required a. Compute the present value of this note. b. Prepare an effective interest schedule for this note. Stated Market Discount Note Date Interest Interest Amortization Carrying Value Jul. 1, 2020 Jun 30, 2021 $ Jun. 30, 2022 Jun 30, 2023 c. Prepare all entries required by Stealth for this note through its maturity date, including year-end adjustments. Date Account Name Dr. cr. Jul 1, 2020 9,600 Sales Revenue Jun 30, 2021 Cash Jun 30, 2022 Cash Jun. 30, 2023 Cash To record interest on note Jun 30, 2023 To record settlement of note

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

A Answer Part 1) 3 Present value of note = annual interest* Present value annuity factor (3,8%) + (Face value / (1+8%)^3 # = ((48000*5%)*((1-(1.08)^-3)/.08))+(48000/(1.08)^3) 5 = (24000*2.577097) +(48000/1.259712) 5 = 6185+38104 - = $ 44289 Thus the correct answer is $ 44289 1 Part 2) Stated Interest (48000*5%) Market Interest (Carrying Value *8%) 2 Date 3 Jul. 1. 2020 4 Jun. 30. 2021 2400 (48000*5%) 2400 (48000*5%) 2400 (48000*5%) 6 Jun. 30. 2022 Discount Note Carrying Amortization Value (beginning (Market interest - value + discount Stated Interest) Amortized) 44289 1143 45432 (3543-2400) (44289+1143) 1235 46667 (3635-2400) (45432+1235) 1333 48000 (3733-2400) (46667+1333) 3543 (44289*8%) 3635 (45432*8%) 3733 (46667*8%) 8 Jun. 30. 2023

1 Part 3) 2 Date 3 Jul. 1. 2020 Dr. 44289 9600 53889 mo 7 Jun. 30. 2021 1143 2400 3543 o Jun. 30. 2022 1235 Account Name Note Receivable Cash Sales Revenue Sale Revenue Note receivable Cash Interest Revenue Note receivable Cash Interest Revenue Note receivable Cash Interest Revenue To record interest on note Cash Note Receivable To record settlement of note 3635 N 3 Jun. 30. 2023 2400 3733 U O 7 Jun. 30. 2023 48000 48000 90 90