[whitesoxfancpa]

It’s been a while since I have seen notes payable or receivable or bonds, and I am having a little trouble on a couple topics in F4 in Becker. Here is the first question:

On August 1, Year 1, Vann Corp.’s $500,000, one year, noninterest-bearing note due July 31, Year 2, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discount. What amount should Vann report for notes payable in its December 31, Year 1 balance sheet?

The answer is $468,500, as follows:

$500,000 face amount of note

-$54,000 discount ($500,000 x 10.8%)

=$446,000 proceeds when discounted

+$22,500 straight-line amortization of discount for Aug-Dec ($54,000 x 5/12)

= $468,500 carrying amount at 12/31

That’s fine, but can someone show the journal entries from start to finish for this? What is the initial entry? What are the monthly entries? I am really drawing a big fat blank here and without seeing the journal entries to come up with the $468,500, their math doesn’t really help me.

Is this right:

dr Cash $446,000

dr Discount on notes payable $54,000

cr Notes payable $500,000

To discount note payable to bank

dr Interest expense $4,500

cr Discount on notes payable $4,500

To record monthly interest

So at December 31, Notes payable is $500,000, discount is $31,500, so carrying value is $468,500. I am really grasping here. Would the note be recorded at $446,000 or $500,000? I know for notes receivable they are recorded at PV of future cash flows if they are noninterest bearing.

My second question has me totally lost. I don’t get it at all:

Ace Co. sold to King Co. a $20,000, 8% 5-year note that required five equal annual year-end payments. This notes was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992

9% 3.890

What should be the total interest revenue earned by King on this ntoe?

Answer is $5,560 computed as follows:

Annual payments $20,000 / 3.992 = $5,010

multiplied by 5 equal payments of principal and interest =

total payments of $25,050

Subtract discounted note $5,010 x 3.890 = $(19,490)

= Total interest over 5 years of $5,560

WHAT?!?! I don’t get that at all. Becker never even discussed annuities, PV factors, or how the accounting works for any of this stuff. There’s a half page on discounting and a very simple example of discounting a note to a bank. Nothing about these stupid factors or anything. Can somebody logically and rationally explain how this works, PLEASE?

Thanks to all.

AUD 96 FAR 95 REG 94 BEC 88

[evaianos]

I remember this question. I used Kaplan as review material, but I had same questions with same numbers.

Two steps to consider:

1. Ace has a 20000 note receivable 8% interest, which will be payd back in five payments

The present value of an 8% ordinary anuity for five years is 3.992

Ace will receive back five payments of 5010 each.. ( 20.000/3.992 = 5010/year.)

2. Ace sell the note to King. Thus King will receive 5 payments of 5010/year.

King will not pay 20000 for note because is discounted for 9% (same as bonds)

PV of the note for King is not 20000 because the note was discounted with 9%

PV =Anual payment x Factor

Factor = 3.890 ( ordinary anuity of 9% for 5 years)

PV of the note for King is 3.890×5010= 19489. Thus King will pay 19489 for note

19489 is the amount which King will pay for note, and will receive in exchange 5 payments of 5010

Difference from how much King pay for note and the amount receive in five payments is the interest

25050 – 19489 = 5561

[NJCPA2B]

Wow that question seems so hard…..I don't know how I passed FAR…

BEC=77, FAR=78, REG=73,74,80, AUD=70,69, 84 DONE!

[Anonymous]

that is a good question

[gorban]

The first question about Vann Corporation is simple. You have a note payable sold at a discount. You account for it the same way that you account for bonds payable. Record the DR Cash $446K DR Discount $54K and the Cr to Note Payable for $500K. The amortize the discount using the straight line method: $54,000/12 = $4,500 per month. You start with the carrying value of $54,000 and every month you add $4,500 to the carrying amount.

Done! What is next?

[Author]

Replies