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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Notes Receivable On January 1, 2019, Worthylake Company sold used machinery to Brown Company, accepting a $25,000, non-interest-bearing note maturing on January 1, 2021. Worthylake carried the machinery on its books at a cost of $22,000 and a current book value of $15,000. Neither the fair value of the machinery nor the note was determinable at the time of sale; however. Brown’s incremental borrowing rate was 12%.

Required:

Prepare the journal entries on Worthylake’s books to record:

  1. 1. sale of the machinery
  2. 2. related adjusting entries on December 31, 2019, and 2020
  3. 3. payment of the note by Brown on January 1, 2021

1.

To determine

Prepare the journal entry to record the sale of machinery.

Explanation

Note receivable: Note receivable refers to a written promise by the debtor for the amount with interest, to be received 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.

Prepare the journal entry to record the sale of machinery.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Notes receivable$25,000.00 
 Accumulated depreciation (3)$7,000.00 
 Gain on sale of machinery (2) $4,929.85
 Discount on notes receivable (1) $5,070.15
 Machinery $22,000.00
 (To record the gain on sale of machinery and the machinery is sold on note)  

Table (1)

Working note (1):

Calculate the amount of discount on notes receivable.

Discount on notes receivable=Notes receivablePresent value of the note=Notes receivable(Notes receivable×pn=2,i=12%)=$25,000($25,000×0.797194)=$5,070

2.

To determine

Record the related adjusting entries on December 31, 2019 and 2020.

3.

To determine

Record the payment of note by Company B on January 1, 2021.

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