Chapter 1 Problem 12-20
1. Principal payment 1,000,000
Interest payment (3,000,000 x 12%) 360,000
Total payment on December 31, 2008 1,360,000
Principal payment 1,000,000
Interest payment (2,000,000 x 12%) 240,000
Total payment on December 31, 2009 1,240,000
Principal payment 1,000,000
Interest payment (1,000,000 x 12%) 120,000
Total payment on December 31, 2010 1,120,000
December 31, 2008 payment (1,360,000 x .91) 1,237,600
December 31, 2009 payment (1,240,000 x .83) 1,029,200
December 31, 2010 payment (1,120,000 x .75) 840,000
Total present value on January 1, 2008 3,106,800
2. Journal entries
2008
Jan. 1 Held to maturity securities 3,106,800
Cash 3,106,800
Dec. 31 Cash 360,000
Interest income 360,000
31 Interest income 49,320
Held to maturity securities 49,320
Interest received 360,000
Interest income (3,106,800 x 10%) 310,680
Premium amortization 49,320
Dec. 31 Cash 1,000,000
Held to maturity securities 1,000,000
3. Acquisition cost – 1/1/2008 3,106,800
Premium amortization for 2008 ( 49,320)
Annual installment (1,000,000)
Carrying value of investment – 12/31/2008 2,057,480
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