On January 2, 2017, Criswell Acres purchased from Mifflinburg Farm Supply a new tractor that had a cash selling price of $109,837. As payment, Criswell gave Mifflinburg Farm Supply $25,000 in cash and a $100,000, five-year note that provided for annual interest payments at 6%. At the time of the sale, the interest rate normally charged to farms with Criswell's credit rating is 10%. Required:1. Prepare Mufflinburg Farm Supply's journal entry to record the sale. 2. Prepare the journal entry to record the first interest payment Mifflinburg Farm Supply received on December 31, 2017. 3. Determine the note receivable balance that Mifflinburg Farm Supply will report on December 31, 2018. 4. Determine Mifflinburg Farm Supply's note receivable balance on December 31, 2018, assuming that the company reports notes receivable at fair value and the relevant rate of interest at that time has fallen to 8%. Assume that the December 31, 2018, interest payment has been made.

Question
Asked Nov 8, 2019
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On January 2, 2017, Criswell Acres purchased from Mifflinburg Farm Supply a new tractor that had a cash selling price of $109,837. As payment, Criswell gave Mifflinburg Farm Supply $25,000 in cash and a $100,000, five-year note that provided for annual interest payments at 6%. At the time of the sale, the interest rate normally charged to farms with Criswell's credit rating is 10%. 

Required:

1. Prepare Mufflinburg Farm Supply's journal entry to record the sale. 

2. Prepare the journal entry to record the first interest payment Mifflinburg Farm Supply received on December 31, 2017. 

3. Determine the note receivable balance that Mifflinburg Farm Supply will report on December 31, 2018. 

4. Determine Mifflinburg Farm Supply's note receivable balance on December 31, 2018, assuming that the company reports notes receivable at fair value and the relevant rate of interest at that time has fallen to 8%. Assume that the December 31, 2018, interest payment has been made. 

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Expert Answer

Step 1
(1)
Calculation of the present value of Criswell Acre's note at a 10% effective rate of interest:
Present value of $100,000 principal repayment in 5 years at 10%
$62,092
$100,000
0.62092
Present value of five interest payments of $6,000(S100,000 x .06) each at
Year 1
Year 2
Year 3
Year 4
Year 5
0.90909
0.82645
$5,455
$4,959
$6,000
X
$6,000
$6,000
X
0.75132
$4,508
$4,098
X
0.68301
$6,000
$6,000
0.62092
$3,726
Total present value of the Notes receivable
$84,837
Journal entry:
Accounts title
Notes receivable
Cash
Date
Debit (S)
Credit (S)
$84,837
$25,000
$109,837
Sales revenue
(To record the sale of tractor)
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(1) Calculation of the present value of Criswell Acre's note at a 10% effective rate of interest: Present value of $100,000 principal repayment in 5 years at 10% $62,092 $100,000 0.62092 Present value of five interest payments of $6,000(S100,000 x .06) each at Year 1 Year 2 Year 3 Year 4 Year 5 0.90909 0.82645 $5,455 $4,959 $6,000 X $6,000 $6,000 X 0.75132 $4,508 $4,098 X 0.68301 $6,000 $6,000 0.62092 $3,726 Total present value of the Notes receivable $84,837 Journal entry: Accounts title Notes receivable Cash Date Debit (S) Credit (S) $84,837 $25,000 $109,837 Sales revenue (To record the sale of tractor)

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Step 2
(D) End of the
year Present
(B) Cash
(C) Increase in
(A) Interest income @10%
of prior year balance of (D)
(2)
interest
present value of
value of note =
received Notes receivable
Prior (D)(C)
Inception
Year 1 (2017)
Year 2 (2018)
Year 3 (2019)
Year 4 (2020)
Year 5 (2021)
$84,837
$8,484
$8,732
$6,000
$2,484
$2,732
$87,321
$6,000
$90,053
$93,058
$96,364
$9,005
$6,000
$6,000
$3.005
$3,306
$3,636
$9,306
$9,636
$6,000
$100,000
Journal entry:
Date
Accounts title
Cash
Notes receivable
Debit (S)
$6,000
$2,484
Credit (S)
Interest income
S8,484
|(To record the receipt of first year interest income)
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(D) End of the year Present (B) Cash (C) Increase in (A) Interest income @10% of prior year balance of (D) (2) interest present value of value of note = received Notes receivable Prior (D)(C) Inception Year 1 (2017) Year 2 (2018) Year 3 (2019) Year 4 (2020) Year 5 (2021) $84,837 $8,484 $8,732 $6,000 $2,484 $2,732 $87,321 $6,000 $90,053 $93,058 $96,364 $9,005 $6,000 $6,000 $3.005 $3,306 $3,636 $9,306 $9,636 $6,000 $100,000 Journal entry: Date Accounts title Cash Notes receivable Debit (S) $6,000 $2,484 Credit (S) Interest income S8,484 |(To record the receipt of first year interest income)

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Step 3
(3)
As on December 31, 2018, Notes receivable balance will be $90,053.
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(3) As on December 31, 2018, Notes receivable balance will be $90,053.

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