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Chapter 14: Q15Q (page 753)

How is the present value of a non-interest-bearing note computed?

Short Answer

Expert verified

The present value of the non-interest-bearing note is calculated using the following formula:

Presentvalue=Futurevalue脳1(1+r)n

Step by step solution

01

Definition of Non-Interest-Bearing Note

The non-interest-bearing note can be defined as the, not withno coupon rate. Such notes are issued at a lower price than their par value and are redeemed at par.

02

Calculation of present value of the non-interest-bearing note

The present value of the non-interest-bearing note is calculated by multiplying the present value factor with the future value of the note. The future value of the note means the face value of the note. r is the interest rate applicable on a similar note, and n refers to the period of the note.

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Most popular questions from this chapter

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

(Amortization Schedule鈥擲traight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton鈥檚 December 31, 2017, adjusting entry.

Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)

Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of \(330,000 plus \)33,000 of accrued interest. The note is due today, December 31, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods.

Single sum

0.93543

0.93201

0.92589

0.92521

0.92184

0.91514

Ordinary annuity of 1

2.86989

2.86295

2.85602

2.84913

2.84226

2.82861

Instructions

(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)363,000 as the present value of the total future cash flows.)

(b) Prepare a schedule of debt reduction and interest expense for the years 2017 through 2020.

(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.

(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.

(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.

On January 1, 2017, Ellen Carter Company makes the two following acquisitions.

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)337,012.
  2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank

Instructions

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.
See all solutions

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