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venchlu
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Posted: 03 Mar 2010 at 11:00 \| IP Logged

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance six months after the sale?

a. 75% of the original sales price.

b. Less than 75% of the original sales price.

c. The present value of the remaining monthly payments discounted at 12%.

d. Less than the present value of the remaining monthly payments discounted at 12%.

Hey everyone, I don't even know how to start this question? Help...thx! The question is from Becker F4...

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ael719
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Posted: 03 Mar 2010 at 11:36 \| IP Logged

Start with the Journal Entries and then valuation of the Note Receivable.

The concept this question is testing seems to be what is the valuation of the original Note. Is it recorded at original sales price or is it recorded at the present value of future cash flows discounted at 12%?

I pick answer A because the N/R is recorded at face and interest collected goes to Interest Revenue.

venchlu
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Posted: 03 Mar 2010 at 12:12 \| IP Logged

i picked A also but the correct answer is c...I am lost.

Choice "c" is correct. The present value of the remaining monthly payments discounted at 12% equals the installment note receivable balance at any time.

Choice "a" is incorrect. Because the early loan payments are mostly interest, with little principal pay down, the balance will be more than 75% of the original price.

Choice "b" is incorrect. Because the balance will be more than 75% of the loan balance.

Choice "d" is incorrect. Because the balance will always be the present value of the remaining monthly payments discounted at 12%.

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ael719
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Posted: 03 Mar 2010 at 15:24 \| IP Logged

That makes sense because "A" is the Note Payable recorded for the debtor
and "D" is how the creditor records the Note Receivable at PV of future cash
flows discounted at 12%.

I think, not 100% sure, I'm more clear on bonds ;)

venchlu
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Posted: 03 Mar 2010 at 15:52 \| IP Logged

yeah..i didn't look from the A/R point of view...i only look from the A/P point of view..i agree with ael719.

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