Concept explainers
1.
Prepare the
1.
Explanation of Solution
Note receivable: Note receivable refers to a written promise received by the creditor from the debtor in formal, for the amounts to be settled within a stipulated period of time. This written promise is issued by a debtor or borrower to the lender or creditor. Notes receivable is an asset of a business. Notes receivable often used for the credit periods of more than 60 days.
Record the sale of land on January 1, 2016.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2016 | Cash | $15,000.00 | |
Notes receivable | $15,000.00 | ||
Discount on notes receivable (4) | $2,324.62 | ||
Gain on sale of land (3) | $4,675.38 | ||
Land | $23,000.00 | ||
(To record the gain on sale of land and the land is sold partly for cash and partly for note) |
Table (1)
Working note (1):
Calculate the present value of the note.
Working note (2):
Calculate the present value of the land.
Note:
In the above formula, PO represents present value factor of an ordinary annuity. Factor for POn=2, i=12% is determined using table 4 of the time value of money module.
Working note (3):
Calculate the amount of gain on sale of land.
Working note (4):
Calculate the amount of discount on notes receivable.
Record the interest income earned on note receivable, and the receipt of first instalment for the year ended December 31, 2016.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2016 | Cash | $7,500.00 | |
Discount on notes receivable | $1,521.05 | ||
Interest income (5) | $1,521.05 | ||
Notes receivable | $7,500.00 | ||
(To record the earnings of interest income on non-bearing-interest note, and collection of first instalment) |
Table (2)
Working note (5):
Calculate the amount of interest income.
Record the interest income earned on note receivable, and the receipt of first instalment for the year ended December 31, 2017.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2017 | Cash | $7,500.00 | |
Discount on notes receivable | $803.57 | ||
Interest income (6) | $803.57 | ||
Notes receivable | $7,500.00 | ||
(To record the earnings of interest income on non-bearing-interest note, and collection of second instalment) |
Table (3)
Working note (6):
Calculate the amount of interest income.
2.
Record the journal entries in the books of Company S for July 1, 2016, through July 1, 2018, in regard to the Company H.
2.
Explanation of Solution
Record the
Date | Account Title and Explanation | Debit | Credit |
July 1, 2016 | Depreciation expenses (7) | $2,250.00 | |
$2,250.00 | |||
(To record the depreciation expenses for 6 month) |
Table (4)
Working note (7):
Calculate the depreciation expenses for 6 months from January 1, 2016 to July 1, 2016.
Record the sale of building on July 1, 2016.
Date | Account Title and Explanation | Debit | Credit |
July 1, 2016 | Notes receivable | $100,000.00 | |
Accumulated depreciation (8) | $24,750.00 | ||
Discount on notes receivable (9) | $17,394.60 | ||
Gain on sale of building (10) | $17,355.40 | ||
Building | $90,000.00 | ||
(To record the gain on sale of building and the building is sold on note) |
Table (5)
Working note (8):
Calculate the amount of accumulated depreciation.
Working note (9):
Calculate the amount of discount on notes receivable.
Working note (10):
Calculate the amount of gain on sale of building.
Record the interest income earned on note receivable for the year ended December 31, 2016.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2016 | Discount on notes receivable | $4,132.23 | |
Interest income (12) | $4,132.23 | ||
(To record the earnings of interest income for 6 months) |
Table (6)
Working note (11):
Calculate the amount of interest rate.
Working note (12):
Calculate the amount of interest income earned for 6 months (from July 1 to December 31, 2016).
Record the interest income earned on note receivable for the year ended December 31, 2017.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2017 | Discount on notes receivable | $8,677.68 | |
Interest income (13) | $8,677.68 | ||
(To record the earnings of interest income for 1 year) |
Table (7)
Working note (13):
Calculate the amount of interest income.
Record the interest income earned on note receivable for the last 6 months.
Date | Account Title and Explanation | Debit | Credit |
July 1, 2018 | Discount on notes receivable (14) | $4,545.49 | |
Interest income | $4,545.49 | ||
(To record the earnings of interest income for last 6 months) |
Table (8)
Working note (14):
Calculate the amount of interest income.
Record the collection of cash on note on due date.
Date | Account Title and Explanation | Debit | Credit |
July 30, 2018 | Cash | $100,000.00 | |
Notes receivable | $100,000.00 | ||
(To record the collection on note) |
Table (9)
3.
Prepare the notes receivable portion of Company S’s balance sheet on December 31, 2016 and 2017.
3.
Explanation of Solution
Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the notes receivable portion of Company S’s balance sheet on December 31, 2016 and 2017.
Company S | ||
Balance sheet (Partial) | ||
As at December 31 | ||
Assets | December 31, 2016 | December 31, 2017 |
Notes receivable | $107,500.00 (14) | $100,000.00 (16) |
Less: Discount on notes receivable | ($14,026.74) (15) | ($4,545.49) (17) |
$93,473.26 | $95,454.51 |
Table (10)
Working note (14):
Calculate the amount of notes receivable at December 31, 2016.
Working note (15):
Calculate the amount of discount on notes receivable at December 31, 2016.
Working note (16):
Determine the amount of notes receivable at December 31, 2017.
Working note (17):
Determine the amount of discount on notes receivable at December 31, 2017.
Want to see more full solutions like this?
Chapter 13 Solutions
Bundle: Intermediate Accounting: Reporting And Analysis, 2017 Update, Loose-leaf Version, 2nd + Lms Integrated Cengagenowv2, 2 Terms Printed Access Card
- Comprehensive Notes Receivable On January 1, 2019, Seaver Company sold land with a book value of 23,000 to Bench Company. Bench paid 15,000 down and signed a 15,000 non-interest-bearing note, payable in two 7,500 annual installments on December 31, 2019, and 2020. Neither the fair value of the land nor of the note is determinable. Benchs incremental borrowing rate is 12%. Later in the year, on July 1, 2019, Seaver sold a building to Hane Company, accepting a 2-year, 100,000 non-interest-bearing note due July 1, 2021. The fair value of the building was 82,644.00 on the date of the sale. The building had been purchased at a cost of 90,000 on January 1, 2014, and had a book value of 67,500 on December 31, 2018. It was being depreciated on a straight-line basis (no residual value) over a 20-year life. Required: 1. Prepare all the journal entries on Seavers books for January 1, 2019, through December 31, 2020, in regard to the Bench note. 2. Prepare all the journal entries on Seavers books for July 1, 2019, through July 1, 2021, in regard to the Hane note. 3. Prepare the notes receivable portion of Seavers balance sheet on December 31, 2019 and 2020.arrow_forwardNotes Receivable and Income On January 1, 2019, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitts books of 10,000. Chatham gave Pitt a 60,000, non-interest-bearing note payable in five equal annual installments of 12,000 with the first payment due and paid on January 1, 2020. There was no established price for the patent, and the note has no ready market value. The prevailing rate of interest for a note of this type at January 1, 2019, is 12%. Required: 1. Prepare a schedule showing the income or loss before income taxes that Pitt should record for the years ended December 31, 2019 and 2020. Show supporting computations in good form. 2. Next Level If Pitt inadvertently failed to discount the note and instead recorded it at its gross value, what would be the effect on income or loss before income taxes for the year ended December 31, 2019?arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Prepare a schedule showing the effect of the notes on net income in each of the 4 years.arrow_forward
- Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: 1. Prepare a schedule showing annual cash flows fur the two notes in each of the 4 years.arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Which figure, net income or net cash flow, does the better job of telling the banks stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.arrow_forwardNon-Interest-Bearing Note Payable: Present Value On January 1, 2019, Northern Manufacturing Company bought a piece of equipment by signing a non-interest-bearing 80,000, 1-year note. The face value of the note includes the price of the equipment and the interest. The effective interest rate is an annual rate of 16%, and the note is to be paid in four 20,000 quarterly installments on March 31, June 30, September 30, and December 31. The price of the equipment is the present value of the four payments discounted at the effective interest rate. Required: Prepare all journal entries to record the preceding information. Present value techniques should be used. If Northerns financial statements were issued on June 30, 2019, what amount would the company report as notes payable?arrow_forward
- Hamlet Corporation purchases computer equipment at a price of 100,000 on January 1, 2019, paying 40,000 down and agreeing to pay the balance in three 20.000 annual instalments beginning December 31, 2019. It is not possible to value either the equipment or the 60,000 note directly; how-ever, Hamlet's incremental borrowing rate is 12%. Required: 1. Prepare a schedule to compute the interest expense and discount amortization on the note. 2. Prepare all the journal entries for Hamlet to record the issuance of the note, each annual interest expense, and the three annual installment payments.arrow_forwardNotes Receivable On September 1, 2016, Dougherty Corp. accepted a six-month, 7%, $45,000 interest-bearing note from Rozelle Company in payment of an account receivable. Doughertys year-end is December 31. Rozelle paid the note and interest on the due date. Required Who is the maker and who is the payee of the note? What is the maturity date of the note? Prepare all necessary journal entries that Dougherty needs to make in connection with this note.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning