Question

Assume that Mahmood Corp. lends Ahmad $10,000 in exchange for a $10,000,

three-year note bearing interest at 10 percent annually. The market rate of interest for a
note of similar risk is also 8 percent.
1. What is the present value?
2. What the entry is at the date of lends?
3. Prepare the schedule of the loan?
4. What is the entry at the end of year?

Answer 1

1) the present value of the note:

PV of face value = $10,000 / (1 + 8%)³ = $7,938.32

PV of interest payments = $1,000 x 2.5771 (PV annuity factor, 8%, 3 periods) = $2,577.10

PV of note = $10,515.42

2) Dr Notes receivable 10,515.42

Cr Cash 10,000

Cr Discount on notes receivable 515.42

3) assuming the loan was made January 2, 2021

Date Cash flow Discount Balance

January 2, 2021 -$10,000 $10,515.42

January 2, 2022 $1,000 $171.81 $10,343.61

January 2, 2023 $1,000 $171.81 $10,171.80

January 2, 2024 $11,000 $171.80 $0

4) December 31, accrued interest on notes receivable

Dr Interest receivable 1,000

Dr Discount on notes receivable 171.81

Cr Interest revenue 1,171.81