Question

The ABC Company rendered services on 1/1/15 and accepted a $10,000, 4%, 5-year note receivable with interest to be paid annually on December 31 through 12/31/19. The principal will be paid in full on 12/31/19. ABC's imputed interest rate is 8% and the effective amortization method is used. The initial journal entry to record the receipt of the note will include an entry to which account for what approximate amount? Select one: a. Debit to Discount on Notes Receivable for $2,274 b. Credit to Discount on Notes Receivable for $1,597 c. Credit to Discount on Notes Receivable for $2,274 d. Credit to Service Revenue for $7,726 e. Credit to Service Revenue for $10,000 On 1/1/16, the GRF Company performed services and accepted a $10,000, 6%, 5 year note receivable with interest to be paid annually on December 31 through 12/31/20. The principal will be paid in full on 12/31/20. ABC's imputed interest rate is 10% and the effective amortization method is used. of Total approximate Interest Revenue over the life of this note will be: question Select one: a. $3,000 b. $2,274 c. $4,516 d. $1,516 e. $3,791

Answer 1

1)
	Computation Of Value of Note Receivables
	a	Annual Interest Amount	400
		($10000*4%)
	b	PV Annuity Factor for (5 Years,8%)	3.992710037
	c	Present Value Of Annual Interest (a*b)	1597.084015
	d	Redemption Value	10000
	e	PV Factor Of (5 Years,8%)	0.680583197
	g	Present Value Of Redemption Amount (d*e)	6805.83197
	f	Intrinsic Value ( Price ) Of The Bond (c+g)	8402.915985
		Discount on issue of note = 10000-8403
		=$1597
	The journal entry would be
	Date	Account Title	Debit	Credit
		Note Receivables	$         10,000
		Discount On Note Receivables		$         1,597
		Service Revenue		$         8,403
	Correct Option : b. Credit to discount on note receivables $1597
2)	Computation Of Note Receivable Value
	a	Annual Interest Amount	$               600
		($10000*6%)
	b	PV Annuity Factor for (5 Years,10%)	3.790786769
	c	Present Value Of Annual Interest (a*b)	$           2,274
	d	Redemption Value	$         10,000
	e	PV Factor Of (5 Years,10%)	0.620921323
	g	Present Value Of Redemption Amount (d*e)	$           6,209
	f	Intrinsic Value ( Price ) Of The Bond (c+g)	$     8,483.69

Year	Opening Balance	Interest	Cash Received	Closing Balance
0				$           8,484
1	$         8,484	$         848	$                 600	$           8,732
2	$         8,732	$         873	$                 600	$           9,005
3	$         9,005	$         901	$                 600	$           9,306
4	$         9,306	$         931	$                 600	$           9,637
5	$         9,637	$         964	$                 600	$         10,000
	Total	$     4,516
	Correct Option: c.4516

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