Suppose Hammer Consulting Co. provided consulting services to Duder Inc. on December 31,2015, but has decided to allow Duder to pay the balance due over time. Hammer Consulting isconsidering several different note options below. The market rate of interest for a company ofDuder's risk level is 10%.
A. For each option, determine the appropriate amount of service revenue that Hammer wouldrecord on December 31, 2015 and the amount of interest revenue Hammer would recordfor the full year ended December 31, 2017. Use the Present Value tables provided at theend of chapter 7 notes, and do not round the factors. Round all answers to the nearestwhole dollar (including interest and cash payments for each year in your calculation).
Service Revenue at12/31/2015Interest Revenue forthe year ended12/31/2017
Option 1: Hammer Consulting Co. will require Duder to make a down payment of $30,000 on 12/31/2015 and the remainder inthe form of a $90,000, 6% note due in 6 years. Interest payments will be due semi-annually.
Option 2: Hammer Consulting Co. willprovide the consulting services in exchangefor a 4-year, $150,000 non-interest bearingnote. Interest is compounded quarterly.
For requirements B-D below, assume that Hammer Consulting Co. opts for Option # 1 above.
B. Prepare an amortization table. Use the following headings:Date Cash Interest Rev. Disc. Amortized CV
C. Using the effective interest method, determine the unamortized portion of the discount asof December 31, 2019.
D. What is the total amount of interest revenue Hammer will earn over the life of the note? For requirement E below, assume that Hammer Consulting Co. opts for Option # 2 above
.E. Assume that Hammer Consulting Co. recorded the note correctly at the end of 2015 (thedate of its issuance), but forgot to make the necessary adjusting entries in both 2016and 2017. Indicate the effect of this error on 2017 Net Income, Assets, Liabilities, andOwner's Equity (on December 31, 2017).
Please specify the dollar effect of the error.Use O for overstate, U for understate, and NE for no effect. Assume each error isindependent of the others. Ignore income taxes.
Assets
Liabilities
Owner's Equity
Net Income