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XY Makes a loan to TZ and receives in exchange a three-year 50000 note bearing interest at a 9 percent annual rate paid annually The market rate of interest for similar notes 11 percent . Journalize?
Woodz804
First, find the present value of the note.
We use the present value of a lump sum
PV = FV/(1+r)^t
where R is the market rate of interest (11%), T is the number of years (3), and FV is the future value of the note (50,000)
Plus the present value of an ordinary annuity (the 9% of 50,000 annually represents an annuity, which we will use for the PMT):
PV = PMT x (1- [1 / (1+r)^t] / r )
That will tell us how much of a premium or discount to record (in this case it should be a discount) by subtracting the total of the two formulas from 50,000.
The journal entry should look like this for the company making the loan:
Notes Receivable
---Discount on Notes Receivable
---Cash
Then, every year, we amortize that by finding 11% of the carrying value of the note (Total PV we calculated x the market rate of interest). Whatever cash we pay (9% of 50,000) is subtracted from it as our interest component of that number. The remainder is amortized.
The journal entry should look a lot like this:
Cash
Discount on Notes Receivable
---Interest Revenue
---Notes Receivable
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∙ 14y ago
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"Compounded annually" means that the interest is added once a year.
How do you converts interest rate from compounding quarterly to compound annually?
Interest of r% per quarter is equivalent to {(1+r/100)4 - 1} percent annually.
What is the simple interest paid annually for 5 years on a 700 loan at 11 percent per year?
The interest paid annually is 700*5/100 = 35
Does Interest Compounded semi-annually double every year?
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How many times interest be added to the principal in one year if the interest is compounded semi-annually?
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Once.
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