ACC422 – Intermediate Accounting II
Learning Team D Assignment – Week 2
This assignment is worth a total of 75 points distributed evenly among the two problems. It will be graded based upon both the accuracy of your solutions (2/3) and effort (1/3). Points for effort will be impacted by poor formatting, poor organization, clear lack of effort, lack of supporting calculations, and careless errors. Any simple arithmetic errors, unbalanced journal entries, or unbalanced schedules will result in zero effort points for that problem. Show your work and double check your math and entries!
Problem 1:
The following information pertains to UZM Company’s receivables:
Note receivable 1:
On August 1, 2011 UZM Company accepted a note receivable in the amount of $666,000 for the sale of an old factory building to another company. The note carries an annual interest rate of 6% and provides for annual payments of $111,000 plus interest beginning on August 1, 2012 and ending on August 1, 2017. All payments due as of December 31, 2013 have been paid.
Note receivable 2:
On January 1, 2013 UZM Company loaned $397,000 to The LRP Company, a valuable vendor that was experiencing some cash flow difficulties. The note carries a 10% interest rate compounded annually. The note calls for full payment, including all interest, on December 31, 2015. The note is collateralized by 35,000 shares of LRP Company common stock with a December 31, 2013 market value of $15 per share. The note provides that if the overall value of the LRP Company stock should fall below 102% of the note receivable amount including accrued interest, UZM Company may sell the LRP Company stock to satisfy the outstanding note receivable.
Note receivable 3:
On August 1, 2013 UZM Company sold the formula for a secret process to another company in exchange for a $142,000 zero-interest-bearing note due on August 1, 2017. The formula had no established exchange price and there is no ready market for the note. The current market rate of interest for such a note was 10% on the date the note was created. (The present value of $1 for 4 periods at 10% is 0.68301.)
Note receivable 4:
On September 1, 2013 UZM Company sold land for its fair market value of $540,000 under an installment sales contract that provided for a $108,000 down payment and annual payments of $167,630 beginning on July 1, 2014 and ending on July 1, 2016. The contract carries a 8% interest rate.
Collection of the payments due under each of the notes is reasonably assured.
Instructions:
A. Prepare the long-term receivables section of UZM Company’s balance sheet as of December 31, 2013.
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To prepare the long-term receivables section of UZM Company's balance sheet as of December 31, 2013, we need to account for each of the notes receivable mentioned in the problem.
Note receivable 1:
This note receivable has annual payments of $111,000 plus interest beginning on August 1, 2012, and ending on August 1, 2017. The payments due as of December 31, 2013, have been paid. To calculate the remaining balance, we need to find the present value of the remaining payments.
PV of remaining payments = (PMT * PV factor) + (PMT * PV factor) + (PMT * PV factor)
PV factor = (1 - (1 / (1 + r)^n)) / r
Where PMT is the annual payment, r is the interest rate, and n is the number of periods.
Using the given data:
PMT = $111,000
r = 6%
n = (2017 - 2013) = 4 periods
PV factor = (1 - (1 / (1 + 0.06)^4)) / 0.06 = 3.465103
Remaining balance = (111,000 * 3.465103) = $385,016.23
Note receivable 2:
This note receivable is collateralized by 35,000 shares of LRP Company common stock with a market value of $15 per share on December 31, 2013. To calculate the value of the note receivable, we need to determine the overall value of the LRP Company stock and ensure it is above 102% of the note receivable amount.
Overall value of LRP Company stock = (35,000 shares * $15) = $525,000
Since the market value of the LRP Company stock is greater than 102% of the note receivable amount, we can assume that the note receivable is fully collectible. The value of the note receivable is $397,000.
Note receivable 3:
This note receivable has a face value of $142,000 and is zero-interest-bearing. However, it carries an implicit interest rate of 10% based on the market rate of interest at the time the note was created. We need to calculate the present value of the note.
PV of note receivable = Face value * PV factor
PV factor = (1 - (1 / (1 + r)^n)) / r
Using the given data:
Face value = $142,000
r = 10%
n = (2017 - 2013) = 4 periods
PV factor = (1 - (1 / (1 + 0.10)^4)) / 0.10 = 3.169861
PV of note receivable = $142,000 * 3.169861 = $450,420.86
Note receivable 4:
This note receivable is derived from the sale of land. The fair market value of the land was $540,000, and an installment sales contract was used with a down payment of $108,000. To calculate the remaining balance, we need to find the present value of the remaining payments.
PV of remaining payments = (Down payment) + (PMT * PV factor) + (PMT * PV factor)
PV factor = (1 - (1 / (1 + r)^n)) / r
Using the given data:
Down payment = $108,000
PMT = $167,630
r = 8%
n = (2016 - 2013) = 3 periods
PV factor = (1 - (1 / (1 + 0.08)^3)) / 0.08 = 2.402402
Remaining balance = $108,000 + (167,630 * 2.402402) = $569,385.60
Now, we can prepare the long-term receivables section of UZM Company's balance sheet as of December 31, 2013:
Long-term Receivables:
Note receivable 1: $385,016.23
Note receivable 2: $397,000
Note receivable 3: $450,420.86
Note receivable 4: $569,385.60
Total long-term receivables: $1,801,822.69