On December 31, 2017, Sandhill Inc. Rendered Services To Beg
On December 31 2017 Sandhill Inc Rendered Services To Beghun Corpor
On December 31, 2017, Sandhill Inc. rendered services to Beghun Corporation at an agreed price of $124,926, accepting $49,600 down and agreeing to accept the balance in four equal installments of $24,800 receivable each December 31. An assumed interest rate of 12% is imputed. Prepare an amortization schedule. Assume that the effective-interest method is used for amortization purposes. December 31, 2017 Schedule of Note Discount Amortization Date Cash Received Interest Revenue Carrying Amount of Note 12/31/17 $ [removed] [removed] [removed] [removed] [removed] [removed] [removed] [removed] [removed] (To record the collection of interest) [removed] [removed] [removed] [removed] [removed] [removed] (To record the collection of the note)
Paper For Above instruction
Silicon Valley’s technological innovation and economic growth have been driven by a complex matrix of financial practices, including the use of notes receivable with embedded interest components. The scenario involving Sandhill Inc. and Beghun Corporation exemplifies the application of the effective-interest method for amortizing discount on receivable notes. This paper will develop an amortization schedule based on the details provided, illustrating the recognition of interest revenue over the term of the note and reflecting the practical implications for financial reporting.
Introduction
The effective-interest method is a standard approach for amortizing bond premiums and discounts, including notes receivable with installment payments that include imputed interest. This method provides a systematic way of recognizing income over time, aligning with the accrual basis of accounting. In this context, Sandhill Inc. issued a note receivable to Beghun Corporation, with a deferred payment structure and an imputed interest rate of 12%. To accurately reflect the financial position and performance, it is essential to prepare an amortization schedule that details the periodic interest revenue and the adjustment of the note's carrying amount.
Analysis and Calculation
Given Data:
- Total sales revenue: $124,926
- Down payment received: $49,600
- Remaining balance: $124,926 - $49,600 = $75,326
- Payment installments: four payments of $24,800 each
- Interest rate (imputed): 12% annually
- Payment schedule: December 31 for four years
- Effective-interest method: used for amortization
Step 1: Determine the initial carrying amount of the note.
The initial carrying amount is the present value of the receivable, excluding the down payment, discounted at 12%.
The future payments are identical ($24,800 each), and the discount rate is annual, payable annually.
Calculations:
- Present value of installments:
- PV of an annuity of $24,800 for 4 years at 12%:
Using the present value of an ordinary annuity formula:
( PV = Payment × [1 - (1 + r)^-n] / r )
where:
- Payment = $24,800
- r = 12% = 0.12
- n = 4
Calculating:
PV = $24,800 × [1 - (1 + 0.12)^-4] / 0.12
PV = $24,800 × [1 - (1.12)^-4] / 0.12
PV = $24,800 × [1 - 0.6355] / 0.12
PV = $24,800 × 0.3645 / 0.12
PV ≈ $24,800 × 3.0375 ≈ $75,301
Thus, the present value of future payments is approximately $75,301, which ideally matches the initial carrying amount of the note.
Amortization Schedule Development
Using the effective-interest method, interest revenue for each period = Carrying amount at start of period × effective interest rate (12%). The difference between interest revenue and cash received (payment) adjusts the carrying amount of the note.
Initial data:
- Date: December 31, 2017
- Initial carrying amount: $75,301 (approximate)
1. December 31, 2017
Carrying amount: $75,301
Interest revenue = $75,301 × 12% ≈ $9,036
Cash received: $24,800 (payment)
Amortization of discount: $24,800 - $9,036 ≈ $15,764
End of period carrying amount: $75,301 + $9,036 - $24,800 = $59,537
2. December 31, 2018
Carrying amount: $59,537
Interest revenue = $59,537 × 12% ≈ $7,144
Cash received: $24,800
Amortization of discount: $24,800 - $7,144 ≈ $17,656
End of period carrying amount: $59,537 + $7,144 - $24,800 ≈ $41,881
3. December 31, 2019
Carrying amount: $41,881
Interest revenue = $41,881 × 12% ≈ $5,025
Cash received: $24,800
Amortization of discount: $24,800 - $5,025 ≈ $19,775
End of period carrying amount: $41,881 + $5,025 - $24,800 ≈ $22,106
4. December 31, 2020
Carrying amount: $22,106
Interest revenue = $22,106 × 12% ≈ $2,653
Cash received: $24,800
Remaining balance adjusted accordingly:
Cash received exceeds interest; thus, the note is fully settled and the remaining balance is paid.
Discussion
The amortization schedule reflects a systematic recognition of interest revenue that aligns with the effective-interest method. Initially, the discount on the note is higher, and a larger portion of each cash receipt represents interest income rather than principal repayment. Over time, as the carrying amount diminishes, interest revenue decreases proportionally, illustrating the pattern of amortization.
Using the effective-interest method ensures that financial statements accurately reflect the economic reality of the receivable, providing transparency to investors and stakeholders. Moreover, this approach adheres to generally accepted accounting principles (GAAP), which mandate recognition of interest income over time based on the actual yield of the note.
Conclusion
In conclusion, preparing an amortization schedule using the effective-interest method involves calculating the initial present value of the installment payments, then systematically recognizing interest revenue and adjusting the note’s carrying amount over the payment periods. For the case of Sandhill Inc., this process demonstrates how the discount on the note is amortized over the four-year period, providing an accurate portrayal of the income attributable to the note over its duration. Such precise accounting treatment is essential for sound financial reporting and decision-making in corporate finance.
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