[wissam]

There is this question:

On Aug 1, Year 1, Vann Corp’s $500,000 1 year, non interest bearing note due July 31, Year 2, was discounted at Homestead Bank at 10.8%. Vann uses the SL method of amortizing bond discount. What carrying amount should Vann report for notes payable in its Dec 31, Year 1, balance sheet?

Answer is B: 468,500.

What notes payable and what does the bond discount have to do with it? Can somebody please explain this.

If this was a note receivable the discounting is pretty straight forward, 10.8% of the 500,000 maturity value is the banks interest and the the company receives the remainder, 446,000. But why the amortization?

[peetree]

Its asking for the carrying value at the end of the year though not the discounted amount. At inception, it would be recorded at 446,000 with the 54,000 being amortized over the life of the note and since they use the straight line method. Its a piece of cake.

Aug 1 through Dec 31 = 5 months.

54000/12 = 4500 * 5 months = 22,500. Since we want to work back up to the face or total amount of 500,000 it would be

446,000 + 22,500 = 468,500.

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[lbi18]

peetree pretty much said it all – since it's S/L amortization, you need to amortize the discount.

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[wissam]

I thought discounting a note at a bank means that you're selling the note to a bank instead of waiting to maturity to be paid, the same way accounts receivable are factored. In other words the note should have been removed from the books when it was discounted, or is this something else?

[lbi18]

The question is talking about a notes payable though, not a notes receivable. I believe (and someone correct me if I am wrong) that notes payable are treated similarly to bonds payable in terms of discounts, premiums, and amortization.

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[peetree]

Correct @lbi

Think of it this way, why would a bank want to buy your debt?

FAR 02/21/13 - 95
REG 07/02/13 - 87
AUD 08/02/13 - 94
BEC 08/30/13 - 85
Ethics Exam - 90

Illinois candidate awaiting his license

Used Becker Self Study | Ninja Audio | Becker Flash Cards | Ninja Notes | Wiley Test Bank

[Author]

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