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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Notes Receivable On January 1, 2019, Lisa Company sold machinery with a book value of $118,000 to Mark Company. Mark signed a $180,000 non-interest-bearing note, payable in three $60,000 annual installments on December 31, 2019, 2020, and 2021. The fair value of the machinery was $149,211.12 on the date of sale. The machinery had been purchased by Lisa at a cost of $160,000.

Required:

  1. 1. Prepare all the journal entries on Lisa’s books for January 1, 2019, through December 31, 2021.
  2. 2. Prepare the notes receivable portion of Lisa’s balance sheet on December 31, 2019 and 2020.

1.

To determine

Prepare the necessary journal entries on Company L for January 1, 2019, through December 31, 2021.

Explanation

Note receivable: Note receivable refers to a written promise by the debtor for the amounts to be received within a stipulated period of 60-90 days or longer time. This written promise is issued by a debtor or, a borrower to the lender or, creditor. Notes receivable is an asset of a business.

Record the sale of machinery on January 1, 2019.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Notes receivable$180,000.00 
 Accumulated depreciation (3)$42,000.00 
 Gain on sale of machinery (2) $31,211.12
 Discount on notes receivable (1) $30,788.88
 Machinery $160,000.00
 (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 receivableFair valuemachinery on January 1, 2019]=$180,000$149,211.12=$30,788.88

Working note (2):

Calculate the amount of gain on sale of land.

Gain on sale of land = Fair market value on the date of saleCost of land=$149,211.12$118,000=$31,211.12

Working note (3):

Calculate the amount of accumulated depreciation.

Accumulated depreciation=Cost of machineryCurrent book value=$160,000$118,000=$42,000

Record the interest income earned on note receivable and the collection of note receivable for the year ended December 31, 2019.

DateAccount Title and ExplanationDebitCredit
December 31, 2019Cash$60,000.00 
 Discount on notes receivable$14,921.11 
 Interest income (5) $14,921.11
 Notes receivable $60,000.00
 (To record the earnings of interest income on non-bearing-interest note and the collection of first instalment)  

Table (2)

Working note (4):

Calculate the amount of interest rate.

Present value of machinery=Annual installment ×Present value of ordinary annuity$149,211.12=$60,000×pOn=3,i=?$149,211

2.

To determine

Prepare the notes receivable portion of Company L’s balance sheet on December 31, 2019 and 2020.

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