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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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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. Bench’s 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. 1. Prepare all the journal entries on Seaver’s books for January 1, 2019, through December 31, 2020, in regard to the Bench note.
  2. 2. Prepare all the journal entries on Seaver’s books for July 1, 2019, through July 1, 2021, in regard to the Hane note.
  3. 3. Prepare the notes receivable portion of Seaver’s balance sheet on December 31, 2019 and 2020.

1.

To determine

Prepare the journal entries on Company S’ books for January 1, 2019, through December 31, 2020, in regard to the Company B.

Explanation

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, 2019.

DateAccount Title and ExplanationDebitCredit
January 1, 2019Cash$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.

Present value of the note =Present value of two annual installment=(Annual installment ×pon=2, i=12%)=($7,500×1.690051)=12,675.38

Working note (2):

Calculate the present value of the land.

Present value of the land = Down payment + Present value of the note=$15,000+$12,675.38=$27,675.38

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.

Gain on sale of land = Present value of the noteBook value of the land=$27,675.38$23,000=4,675.38

Working note (4):

Calculate the amount of discount on notes receivable.

Discount on notes receivable=[Notes receivableNote's presentvalue of an ordinary annuity]=$15,000$12,675

2.

To determine

Record the journal entries in the books of Company S for July 1, 2019, through July 1, 2021, in regard to the Company H.

3.

To determine

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

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