PROBLEM 6
1. Noninterest Bearing Note - Lump Sum
Face amount 1,600,000
PV of 1 @ 17% n=3 0.6244
PV of Note Payable 999,040
*If the problem is silent, use 4 decimals places.
1/1/20x1 Land 999,040
Discount on Notes Payable 600,960
Notes Payable
12/31/20x1 Interest Expense 169,837
Discount on Notes Payable
12/31/20x2 Interest Expense 198,709
Discount on Notes Payable
12/31/20x3 Interest Expense 232,414
Discount on Notes Payable
Notes Payable 1,600,000
Cash
Discount on Notes
Date Interest Expense Present Value
Payable
1/1/20x1 600,960 999,040
12/31/20x1 169,837 431,123 1,168,877
12/31/20x2 198,709 232,414 1,367,586
12/31/20x3 232,414 - 1,600,000
1,600,000
169,837
198,709
232,414
1,600,000
2. Noninterest Bearing Note - Installments
Face amount 400,000
PV of OA @ 17% n=3 2.2096
PV of Note Payable 883,840
1/1/20x1 Land 883,840
Discount on Notes Payable 316,160
Notes Payable
12/31/20X1 Notes Payable 400,000
Interest Expense 150,253
Cash
Discount on Notes Payable
12/31/20X2 Notes Payable 400,000
Interest Expense 107,796
Cash
Discount on Notes Payable
12/31/20X3 Notes Payable 400,000
Interest Expense 58,121
Cash
Discount on Notes Payable
Date Payments Interest Expense Amortization
1/1/20X1
12/31/20X1 400,000 150,253 249,747
12/31/20X2 400,000 107,796 292,204
12/31/20X3 400,000 58,121 341,889
Current Portion
Notes Payable 400,000
1,200,000 Less: Discount on Notes Payable 107,796
Noncurrent Portion
Notes Payable 400,000
Less: Discount on Notes Payable 58,121
400,000 Total Notes Payable
150,253
400,000
107,796
400,000
58,121
Present Value
883,840
634,093
341,889
-
292,204
341,889
634,093
2. Noninterest Bearing Note - Installments in Advance
Face amount 400,000
PV of OA @ 17% n=2 2.7355
PV of Note Payable 1,094,200
Carrying amount of Notes Payable, 1/1/20x2 363,620
Add back: Payment on 1/1/20x2 400,000
Carrying amount of Notes Payable 12/31/20x1 763,620
Date Payments Interest Expense Amortization
1/1/20X1
12/31/20X1 400,000 - 400,000
12/31/20X2 400,000 69,420 330,580
12/31/20X3 400,000 36,362 363,620
Present Value
1,094,200
694,200
363,620
-
4. Loans Payable
Principal amount 3,000,000
Less: Origination Fee 144,111
PV of Note Payable 2,855,889
Trial and Error Approach with Interpolation
1st Trial: 11%
Principal amount 3,000,000
PV of 1 @ 11% n=3 0.731191381
Interest 300,000
PV of OA @ 11% n=3 2.443714715
1st Trial: 12%
Principal amount 3,000,000
PV of 1 @ 12% n=3 0.711780248
Interest 300,000
PV of OA @ 12% n=3 2.401831268
Date
1/1/20X1
12/31/20X1
12/31/20X2
12/31/20X3
2,193,574
733,114
2,926,689 is not equal to 2,855,889
2,135,341
720,549
2,855,890 is equal to 2,855,889
*There is a ₱1 difference which is immaterial.
Therefore, the effective interest rate is 12%
Payments Interest Expense Amortization Present Value
2,855,889
300,000 342,707 (42,707) 2,898,596
300,000 347,831 (47,831) 2,946,427
300,000 353,571 2,946,427 -
Amortization balance, 12/31/20x2 (47,831)
Add back: 12/31/20x2 PV of Notes Payable 2,946,427
Carrying amount on 12/31/20x1 2,898,596
