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friends
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| Posted: 06 Sep 2009 at 20:05 | IP Logged
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Hi,
On December 1, 1995, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 1996. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its 1995 income statements?
The answer is $2,005. I really don¡¦t know how to work on this question? What is repayment? Thanks!!
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bryris
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| Posted: 06 Sep 2009 at 20:47 | IP Logged
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194,000 * 12.4% * (1/12) = 2,005.
The proceeds of the note are to be $200,000 and are to yield 11%. However, the maker of the note took off a 6,000 fee. Accordingly, the money that is outstanding and upon which interest will accrue is the 194,000. The payments are fixed based on the face information. Therefore, to receive the face payments on an outstanding amount of less than face, effectively increases the yield - given at 12.4%
To find interest revenue, you multiply the carrying amount of the note by the effective rate. Then, since only 1 month has elapsed, you must divide by 12.
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| Posted: 06 Sep 2009 at 21:03 | IP Logged
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Thank you! I think I understand it now :)
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| Posted: 06 Sep 2009 at 22:04 | IP Logged
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Bryris or anoyone,
Do you know what the JE would be for both borrower and investor on the above question?
I saw the following example on Becker
$1,000,000 bond is sold at 980,000 and costs of 50,000 are incurred for issue. Here is JE for borrower, what would be the JE for investor? Thanks!!
Cash 930,000
Discount 20,000
Bond Issue Cost 50,000
Bonds Payable 1,000,000
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bryris
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| Posted: 06 Sep 2009 at 22:31 | IP Logged
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Debtor entry:
Cash 194,000
Loan fee (or the like) expense 6,000
Bond Payable 200,000
First payment:
Int exp 1,833
B/P 2,477
Cash 4,310
Creditor entry:
Note Receivable 200,000
Loan Revenue 6,000
Cash 194,000
First Payment:
Cash 4,310
Int Revenue 2,005
Note Rec 2,305
For your second question:
Bond Receivable 1,000,000
Discount 20,000
Cash 980,000
The bond issue costs would go to the broker or exchange and wouldn't be reflected on the actual investor's records.
*Someone correct this if needed - I may have overlooked something*
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