6-4 Gullible Company

Req 1
Face Value of NR (500,000 x 5) 2,500,000
Present Value of NR (500,000 x 3.99) 1,995,000
Unearned Interest Income 505,000

Effective Interest Method of Amortization

DATE COLLECTION INTEREST PRINCIPAL PRESENT VALUE
12/31/2021 1,995,000
12/31/2022 500,000 159600 340400 1654600
12/31/2023 500,000 132368 367632 1286968
12/31/2024 500,000 102957 397043 889925
12/31/2025 500,000 71194 428806 461119
12/31/2026 500,000 38881 461119 0

Req 2
Notes Receivable 12/31/2022 (2,500,000-500,000) 2,000,000
Unearned Interest Income 12/31/2022 (505,000-159,600) 345,400
Notes Receivable at carrying amount 12/31/22 1,654,600

Req 3 Interest Income for 2022 (1,654,000 x .08) 132368

Entries
Dec 31, 2021
Notes Receivable 2,500,000
Sales 1,995,000 8%
Unearned Interest Income 505,000

Dec 31, 2022

Cash 500,000
Notes Receivable 500,000

Unearned Interest Income 159,600

Interest Income 159,600