Accy 510 Fall 2011 TDR exercise 2

Accy 510 Fall 2011 TDR exercise 2 - Issue Date Maturity...

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Borrower and Lender Financial Statement Representations for the Duration of the Note Issue Date 1/1/2006 Amortization Schedule for Sinkhole Company Note Payable to Mayo Inc. Sinkhole Mayo Maturity Date 12/31/2015 Year B/S (1/1) I/S SCF B/S (12/31) B/S (1/1) I/S SCF B/S (12/31) Duration (yrs) 10 $0 $0 $887,000 1/1/2006 $0 $0 ($887,000) $0 Cash int rate 10% 2006 $887,000 $106,440 $100,000 $6,440 $893,440 ($887,000) ($106,440) ($100,000) ($893,440) $887,000 $106,440 $100,000 $893,440 Effect int rate 12% 2007 $893,440 $107,213 $100,000 $7,213 $900,653 ($893,440) ($107,213) ($100,000) ($900,653) $893,440 $107,213 $100,000 $900,653 Face value $1,000,000 2008 $900,653 $108,078 $100,000 $8,078 $908,731 ($900,653) ($108,078) ($100,000) ($908,731) $900,653 $108,078 $100,000 $908,731 Issue price $887,000 2009 $908,731 $109,048 $100,000 $9,048 $917,779 ($908,731) ($109,048) ($100,000) ($917,779) $908,731 $109,048 $100,000 $917,779 2010 $917,779 $110,133 $100,000 $10,133 $927,912 ($917,779) ($110,133) ($100,000) ($927,912) $917,779 $110,133 $100,000 $927,912 2011 $927,912 $111,349 $100,000 $11,349 $939,262 ($927,912) ($111,349) ($100,000) ($939,262) $927,912 $111,349 $100,000 $939,262 2012 $939,262 $112,711 $100,000 $12,711 $951,973 ($939,262) ($112,711) ($100,000) ($951,973) $939,262 $112,711 $100,000 $951,973 2013 $951,973 $114,237 $100,000 $14,237 $966,210 ($951,973) ($114,237) ($100,000) ($966,210) $951,973 $114,237 $100,000 $966,210 2014 $966,210 $115,945 $100,000 $15,945 $982,155 ($966,210) ($115,945) ($100,000) ($982,155) $966,210 $115,945 $100,000 $982,155 2015 $982,155 $117,845 $100,000 $17,845 $1,000,000 ($982,155) ($117,845) ($100,000) ($1,000,000) $982,155 $117,845 $100,000 $1,000,000 ($1,000,000) $0 ($1,000,000) $0 12/31/2015 $1,000,000 $0 $1,000,000 $0 When we say 'B/S' here, we are only referring to the net effect (and to the accounts directly related to the note itself). I've also added the blue-colored rows to show the beginning and ending events to the note txn (so it reflects the financial statements from the beginning of 2006 to the end of 2015). Beginning Balance Effective Interest Cash Interest Eff Interest Amortized Ending Balance For your convenience we attach this analysis of the original contract. Note the following features: (1) The formulas in Column B show how you can use Excel to measure the present value of the cash flows from the contract. (2) The amortization schedule arranges the information about the contract in the usual way it is presented in most accounting texts. Note the adjustment for rounding error in the issue price: since the amount of rounding error (about $14 in this case) is economically negligible, it usually is adjusted via the interest expense recorded in the last year of the life of the note. (3) The financial statement representations in both sets of books are shown in columns K-N and P-R. Once you understand these tables, proceed to the next page.
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Accy 510 Fall 2011 TDR exercise 2 - Issue Date Maturity...

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