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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 and Income On January 1, 2019, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitt’s 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. 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. 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?

1.

To determine

Prepare a schedule showing the income or loss before the income taxes that Company P should record for the years ended December 31, 2019 and 2020 with the supporting calculation.

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 a schedule showing the income or loss before the income taxes that Company P should record for the years ended December 31, 2019 and 2020.

Company P
Income before income taxes on sale of patent
For The Years Ended December 31, 2019 and 2020
Particulars20192020
Gain on sale of patent: 
Sales price (1)$43,257.31 
Carrying value of patent($ 10,000.00) 
 $33,257.31 
Interest income (Schedule 1 and 2)$5,190.88$4,373.78
Income before income taxes$38,448.19$4,373.78

Table (1)

Working note (1):

Calculate the amount of sales price of the patent:

Sales price of patent = [Equal annual installment × presentvalue of ordinary annuity]=$12,000×POn=5, i=12%=$12,000×3

2.

To determine

Identify the effect on the income or loss before income taxes if Company P failed to discount the note for the year ended December 31, 2019.

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