On 1/1/16, Lantana Loan Co., a calendar-year company, accepts a 5%, $500,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payment and repay the full $500,000 at maturity. Complete the amortization table for this note, then complete all

journal entries for 2016.

What will be an ideal response?

Answer:
Amortization Table:

Interest Effective Discount Note
Date Received Interest Amortized Balance
1/1/16 $436,554*
6/30/16 $12,500 $21,828 $9,328 445,882
12/31/16 12,500 22,294 9,794 455,676
6/30/17 12,500 22,784 10,284 465,959
12/31/17 12,500 23,298 10,798 476,757
6/30/18 12,500 23,838 11,338 488,095
12/31/18 12,500 24,405 11,905 500,000
*Calculated using Excel PV function with the following inputs:
N = 6, I/Y = 5%, PMT = $12,500 (500,000 × .05 × 6/12), FV = $500,000
Excel Formula: = PV(.05,6,12500,500000) = $436,554

Journal Entries:
1/1/16 Notes Receivable 500,000
Discount on Notes Receivable 63,446
Cash 436,554

6/30/16 Cash 12,500
Discount on Notes Receivable 9,328
Interest Revenue 21,828

12/31/16 Cash 12,500
Discount on Notes Receivable 9,794
Interest Revenue 22,294