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EXERCISE 7-18

 

1.

7/1/04

Notes Receivable.....................................................................

1,101,460.00

 

 

 

            Discount on Notes Receivable....................................

 

401,460.00

 

 

            Land.............................................................................

 

590,000.00

 

 

            Gain on Sale of Land...................................................

 

110,000.00

 

 

[($700,000 – $590,000)

 

 

 

 

$1,101,460

   Face value of note

 

 

 

       .63552

   Present value of 1 for 4 periods at 12%

 

 

$   700,000

   Present value of note

 

 

 

  1,101,460

   Face value of note

 

 

 

$   401,460

   Discount on note receivable]

 

 

 

 

2.

7/1/04

Notes Receivable....................................................................

400,000.00

 

 

 

            Discount on Notes Receivable....................................

 

178,836.32

 

 

            Service Revenue.........................................................

 

221,163.68

 

 

 

 

 

 

 

Computation of the present value of

 

 

 

 

   the note:

 

 

 

 

            Maturity value

 

400,000.00

 

 

            Present value of $400,000 due

 

 

 

 

               in 8 years at 12%—$400,000

 

 

 

 

               X .40388

$161,552.00

 

 

 

            Present value of $12,000

 

 

 

 

               payable annually for 8 years

 

 

 

 

               at 12% annually—$12,000

 

 

 

 

               X 4.96764

    59,611.68

 

 

 

            Present value of the note and

 

 

 

 

               and interest

 

  221,163.68

 

 

            Discount

 

$178,836.32

 

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