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Assignment

The document provides instructions for calculating the present value of notes issued at a discount and at a premium. For notes issued at a discount, the face value is $4,000,000 but the notes are issued for less than face value, resulting in a discount. The discount must be amortized over the life of the notes. For notes issued at a premium, the face value is $5,000,000 but the notes are issued for more than face value, resulting in a premium. The premium must be amortized over the life of the notes. The document provides the necessary factors and rates to calculate the present value of each note and set up amortization tables to allocate the discount or premium over time.

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Marilou Arcillas Panisales
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222 views3 pages

Assignment

The document provides instructions for calculating the present value of notes issued at a discount and at a premium. For notes issued at a discount, the face value is $4,000,000 but the notes are issued for less than face value, resulting in a discount. The discount must be amortized over the life of the notes. For notes issued at a premium, the face value is $5,000,000 but the notes are issued for more than face value, resulting in a premium. The premium must be amortized over the life of the notes. The document provides the necessary factors and rates to calculate the present value of each note and set up amortization tables to allocate the discount or premium over time.

Uploaded by

Marilou Arcillas Panisales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Notes issued at a discount

 
Face value of notes                                                        4,000,000
Nominal rate                                                                                     6%
Effective rate                                                                                    8%
 
The note is issued on January 1, 2017 and mature in four years on January 1, 2021. The interest is
payable annually every December 31.
 
Since the interest is payable annually there are 4 interest periods. The relevant present value factors
are:
 
PV of 1 at 8% for 4 periods                                                          .7350
PV of ordinary annuity of 1 at 8% for 4 periods               3.3121
 
Instructions:
(a)   Compute for the present value of the note as issue date

Present value of principal 


Present value of annual interest
payments 
Total Present Value of notes      
 
(b)  Compute for the discount

Face value

Market value or issue


price

Discount on notes payable


 
(c)   Prepare the amortization table 
Interest Discount Carrying
Date Interest Paid
Expense Amortization Amount
January 1, 2017 -    
December 31,
2017
December 31,
2018
December 31,
2019
December 31,
2020

Notes issued at a premium


Face value of notes                                                          5,000,000
Nominal rate                                                                                     12%
Effective rate                                                                                    10%
The note is issued on January 1, 2017 and mature in four years on January 1, 2021. The interest is
payable annually every December 31.
Since the interest is payable annually there are 4 interest periods. The relevant present value factors
are:
PV of 1 at 8% for 4 periods                                                          .7462
PV of ordinary annuity of 1 at 8% for 4 periods               5.0757
Instructions:
(a)   Compute for the present value of the note as issue date

Present value of principal


Present value of annual interest
payments
Total Present Value of Notes
 
(b)  Compute for the premium

Face value
Market value or issue
price
Discount on notes payable
 
(c)   Prepare the amortization table 
Interest Premium Carrying
Date Interest Paid
Expense Amortization Amount
January 1, 2017 -    

June 30, 2017


December 31,
2017
June 30, 2018
December 31,
2018
June 30, 2019
December 31,
2019

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