EXERCISE 7-18
1. |
7/1/04 |
Notes Receivable..................................................................... |
1,101,460.00 |
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Discount
on Notes Receivable.................................... |
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401,460.00 |
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Land............................................................................. |
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590,000.00 |
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Gain
on Sale of Land................................................... |
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110,000.00 |
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[($700,000 – $590,000) |
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$1,101,460 |
Face value of note |
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.63552 |
Present value of 1 for 4 periods at 12% |
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$
700,000 |
Present value of note |
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1,101,460 |
Face value of note |
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$ 401,460 |
Discount on note receivable] |
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2. |
7/1/04 |
Notes Receivable.................................................................... |
400,000.00 |
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Discount
on Notes Receivable.................................... |
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178,836.32 |
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Service
Revenue......................................................... |
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221,163.68 |
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Computation of the present value of |
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the note: |
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Maturity
value |
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400,000.00 |
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Present
value of $400,000 due |
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in 8 years at 12%—$400,000 |
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X .40388 |
$161,552.00 |
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Present
value of $12,000 |
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payable annually for 8 years |
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at 12% annually—$12,000 |
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X 4.96764 |
59,611.68 |
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Present
value of the note and |
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and interest |
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221,163.68 |
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Discount |
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$178,836.32 |
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Note
that in class I accounted for the note in part 1 on a net value. When the interest was recognized I debited
the note. The alternate answer given
here accounted for the note on a gross basis with the contra valuation account “Discount on
Note” used to reduce the note receivable to
its net value for the balance sheet.
When interest is recognized under this method the debit is to the
discount on the note. Either method is
acceptable for the quiz.
Note
also that the interest recognition in question 2 would consist of cash and
amortization of the discount eg, first interest payment
Cash $12,000
Discount on Note Receivable $14,540
Interest Revenue ($ 221,164@
12%) 26,540