Question
On May 1, 2020, Effix Ltd. provided services to Harper Inc. in exchange for Harpers $336,000, five-year, zero-interest-bearing note. The implied interest is 8%. Effixs
On May 1, 2020, Effix Ltd. provided services to Harper Inc. in exchange for Harper’s $336,000,
five-year, zero-interest-bearing note. The implied interest is 8%. Effix’s year-end is December
31.
Required:
- Prepare Effix’s entries for the note, the interest entries over the five years and the collection of the note at maturity.
- Using present value calculations prove that the note yields 8%.
- Prepare a partial classified balance sheet as at December 31, 2021. What would be the unamortized discount/premium, if any? How would the classification of the note receivable differ on the partial classified balance sheet as at December 31, 2024?
- If an appropriate market rate of interest for the note receivable is not known, how should the transaction be valued and recorded on December 31, 2020?
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