Question

Preparing Entries and Interest Schedule for Long-Term Note Receivable; Effective Interest Method

On July 1, 2020, Stealth Company sold a machine (classified as inventory) that had a list price of $93,600. The customer paid $15,600 cash and signed a three-year, $78,000 note that specified a stated interest rate of 6%. 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.

$Answer

b. Prepare an effective interest schedule for this note.

Date	Stated Interest	Market Interest	Discount Amortization	Note Carrying Value
Jul. 1, 2020				Answer
Jun. 30, 2021	Answer	Answer	Answer	Answer
Jun. 30, 2022	Answer	Answer	Answer	Answer
Jun. 30, 2023	Answer	Answer	Answer	Answer

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	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	15,600	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	Sales Revenue	Answer	Answer
Jun. 30, 2021	Cash	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
Jun. 30, 2022	Cash	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
Jun. 30, 2023	Cash	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	To record interest on note
Jun. 30, 2023	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableReceivable from FactorNote ReceivableDiscount on Note ReceivablePayable to Seller of ReceivablesRefund LiabilityRecourse LiabilityNote PayableSales RevenueSales ReturnsSales DiscountSales Discount ForfeitedFinancing RevenueInterest RevenueCost of Goods SoldBad Debt ExpenseFinance ExpenseInterest ExpenseLoss on Sale of NoteLoss on Sale of ReceivablesN/A	Answer	Answer
	To record settlement of note

Answer 1

Part a
Table values are based on:
Face Amount	$78,000
Interest Payment	$78,000*6%*6/12 =$2,340
Market Interest rate per period	8.00%
Cash Flow	Table Value(PV of 8% for 3 Years)	Amount	Present Value
PV of Interest	2.5771	$2,340	$6,030
PV of Principal	0.79383	$78,000	$61,920
PV of Notes Payable(Issue Price)			$67,950
Note:The present value figures are rounded off to 5 decimal points and the final figure is rounded off to $67,950
Part b
Date	Cash Interest paid	Interest expenses	Discount amortized	Unamortized Discount	Note carrying amount
Col I	Col II	Col III	Col IV(Col III - Col II)		Col VI
Jul 1,2020				$                                10,050	$                            67,950
Jun 30,2021	$                                           2,340	$                                           5,436	$                         3,096	$                                  6,954	$                            71,046
Jun 30,2022	$                                           2,340	$                                           5,684	$                         3,344	$                                  3,610	$                            74,390
Jun 30,2023	$                                           2,340	$                                           5,950	$                         3,610	$                                         0	$                            78,000
Part c
Date	Accounts and explanation	Debit(in $)	Credit(in $)
Jul 1,2020	Cash	$                                         67,950
	Discount on Note Payable	$                                         10,050
	Note Payable		$                       78,000
Jun 30,2021	Interest expense	$                                           5,436
	Cash		$                         2,340
	Discount on Note Payable		$                         3,096
Jun 30,2022	Interest expense	$                                           5,684
	Cash		$                         2,340
	Discount on Note Payable		$                         3,344
Jun 30,2023	Interest expense	$                                           5,950
	Cash		$                         2,340
	Discount on Note Payable		$                         3,610
Jun 30,2023	Note Payable	$                                         78,000
	Cash		$                       78,000