3- 8. (Pinky Pop Company) The note is interest-bearing, but the rate of interest of the note (5%) is unreasonably lower than the prevailing rate (10%) for similar obligation. The present value of the note is determined as follows: 2.5 M + (5% x 7.5 M) 2,875,000 0.9091 P2,613,663 2.5 M + (5% x 5.0 M) = 2,750,000 0.8264 2,272,600 2.5 M + (5% x 2.5 M) = 2,625,000 0.7513 1,972,163 Total P6,858,426 of 2.5 M x 2.4869 P6,217,250 (5% x 7.5 M) x 0.9091 340,913 (5% x 5.0 M) x 0.8264 206,600 5% x 2.5 M) x 0.7513 93,913 Total P6,858,676 (a) Amortization Table Payment of Interest Interest Amortization Carrying Date Principal Paid Revenue of Discount Value 01/01/13 6,858,426 12/31/13 2,500,000 375,000 685,843 310,843 4,669,269 12/31/14 2,500,000 250,000 466,927 216,927 2,386,196 12/31/15 2,500,000 125,000 238,804* 113,804* *difference is due to rounding off (b) Journal entries 2013 Jan. 1 Notes Receivable 7,500,000 Discount on Notes Receivable 641.574 Gain on Sale of Land 858,426 Land 6,000,000 7,500,000 - 6,858,426 = 641,574 Discount 6,858,426 - 6,000,000 = 858,426 Gain Dec. 31 Cash 2,875,000 Discount on Notes Receivable 310,843 Interest Revenue 685,843 Notes Receivable 2,500,000 2014 Dec. 31 Cash 2,750,000 Discount on Notes Receivable 216,927 Interest Revenue 466,927 Notes Receivable 2,500,000 2015 Dec. 31 Cash 2,625,000 Discount on Notes Receivable 113,804 Interest Revenue 238,804 Notes Receivable 2,500,000