Starstruck

Solutions

Assignment 7-17

Requirement 1

Present value:

 Maturity value $45,000 (P/F, 5%, 2)         =  $40,816

 Interest $450 (P/A, 5%,2)                         =         837

 $   41,653

Requirement 2

1 January 20x6

 Note receivable ............................................................ 45,000

         Discount on note receivable* ....................................... 3,347

               Sales revenue ............................................................ 41,653

 *$45,000 – $41,653

31 December 20x6

 Cash .......................................................................... 450

 Discount on note receivable .................................... 1,633

     Interest revenue ($41,653 x 5%) ........................................ 2,083

31 December 20x7

 Cash ........................................................................ 45,450

 Discount on note receivable ..................................... 1,714

      Interest revenue ($41,653 + $1,633 = $43,286) x 5% ......... 2,164

      Note receivable .................................................................. 45,000

Requirement 3

If discounting were disregarded, 20x6 sales would be recorded at $45,000 and overstated.   Notes receivable would be recorded at $45,000, and also overstated. Interest revenue in 20x6 and 20x7 would be $450, the cash received, and would be understated; revenue would not reflect the market rate of 5%.

Requirement 4

1 January 20x6

 Machinery ............................................................. 41,653

 Discount on note payable ...................................... 3,347

       Notes payable ................................................................... 45,000

31 December 20x6

 Interest expense ........................................................ 2,083

 Discount on note payable ............................................ 1,633

      Cash .................................................................................. 450

31 December 20x7

 Interest expense ........................................................ 2,164

 Note payable ........................................................... 45,000

   Discount on note payable ................................................... 1,714

    Cash ................................................................................ 45,450

Requirement 5

1 January 20x6

 Note receivable ................................................. 45,000

Discount on note receivable* ............................... 3,347     Sales revenue .................................................... 41,653

*$45,000 – $41,653

31 October 20x6

 Interest receivable ($450 x 10/12) ............................. 375

 Discount on note receivable ($1,633 x 10/12) ......... 1,361

       Interest revenue ($2,083 x 10/12) ................................... 1,736

31 December 20x6

 Cash ........................................................................ 450

 Discount on note receivable ($1,633 x 2/12) ........... 272

      Interest receivable .............................................................. 375

      Interest revenue ($2,083 x 2/12) ......................................... 347

31 October 20x7

 Interest receivable ($450 x 10/12) ........................................375

 Discount on note receivable ($1,714 x 10/12) ...................1,428

        Interest revenue ($2,164 x 10/12) ..................................... 1,803

31 December 20x7

 Cash ..........................................................................   . 45,450

 Discount on note receivable ($1,714 x 2/12) ....................   286