Interest Bearing NOTE - Periodic Collection ( Interest ONLY) Discount PDF

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INTEREST-BEARING NOTE

PERIODIC COLLECTION (INTEREST ONLY)

DISCOUNT ON N/R

BEBE Co. received from KOH Co. a 5-year, 10% note on January 1, 2020 for P5,000,000 which is due on Jan. 1, 2025 for the sale of the building. The cash price of the building is not readily determinable. The carrying value of the building on the date of sale is P4,200,000. On January 1, 2020, the prevailing rate of interest for a similar obligation is 12%. Annual interest is receivable every December 31. Interest = 5,000,000 x 10% = 500,000

Down payment Present Value of Future Cash Inflows (5,000,000 x 0.5674) = + (500,000 x 3.6048) =

0 4,639,000

Initial CV of N/R in the amortization table

2,837,000 1,802,400 4,639,400

Sales Price of Building

4,639,000

Face Value Present Value Discount on Notes Receivable

5,000,000 (4,639,400) 360,600

AMORTIZATION TABLE FACE VALUE x NOMINAL RATE

Date 1/1/20 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24

NOMINAL RATE < EFFECTIVE RATE

EFFECTIVE RATE x CV OF N/R

Nominal Interest (10%) 500,000 500,000 500,000 500,000 500,000

Effective Interest (12%) 556,728 563,535 571,160 579,699 589,478 Interest Income

JE: 12/31/20

Cash 500,000 Interest Income 500,000

SHORTCUT METHOD Date 1/1/20 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24

CV of N/R 4,639,400 4,696,128 4,759,663 4,830,823 4,910,522 5,000,000

NOMINAL - EFFECTIVE

PREV. CV OF NOTES + AMORTIZATION OF DISCOUNT

Amortization of Discount 56,728 63,535 71,160 79,699 89,478 360,600

Discount on N/R Interest Income

CV of Notes Receivable 4,639,400 4,696,128 4,759,663 4,830,823 4,910,522 5,000,000

56,728 56,728

FORMULA: CV x 1.ER – Cash Inflows

= 4,639,400 x 1.12 – 500,000 = 4,639,400 x 1.12 – 500,000 x 1.12 – 500,000 = 4,639,400 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000 = 4,639,400 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000 = 4,639,400 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000 x 1.12 – 500,000

REQUIRED: (FAQs) 1. How much is the Gain or Loss on Sale of Building? Sales Price Carrying Value of Building Gain on Sale (Profit or Loss)

4,639,400 (4,200,000) 439,400

2. How much is the Interest Income for the year 2021? See amortization table! Interest Income = CV x Effective Rate x Time Interest Income (2021)

= 12/31/2020 CV x ER x 12/12 = 4,696,128 x 12% x 12/12 = 563,535

3. How much is the Carrying Value of Notes Receivable on Dec. 31, 2020? See amortization table! Face Value, 12/31/20 Discount on N/R, 12/31/20

5,000,000 (303,872)

(360,600 – 56,728)

CV of Notes Receivable, 12/31/20

4,696,128

4. How much is the Current and Noncurrent Portion of Notes Receivable on Dec. 31, 2020? Current Portion = 0 Noncurrent Portion = CV of N/R (12/31/20) = 4,696,128...