On July 1, 2020, Flounder Inc. made two sales.
1. | It sold land having a fair value of $901,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,417,737. The land is carried on Flounder's books at a cost of $592,800. | |
2. | It rendered services in exchange for a 3%, 8-year promissory note having a face value of $403,820 (interest payable annually). |
Flounder Inc. recently had to pay 8% interest for money that it
borrowed from British National Bank. The customers in these two
transactions have credit ratings that require them to borrow money
at 12% interest.
Record the two journal entries that should be recorded by Flounder
Inc. for the sales transactions above that took place on July 1,
2020. (Round present value factor calculations to 5
decimal places, e.g. 1.25124 and final answers to 0 decimal places,
e.g. 5,275. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts. Credit account titles
are automatically indented when the amount is entered. Do not
indent manually.)
No. |
Date |
Account Titles and Explanation |
Debit |
Credit |
---|---|---|---|---|
1. |
July 1, 2020 |
enter an account title |
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enter an account title |
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enter an account title |
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enter an account title |
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2. |
July 1, 2020 |
enter an account title |
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enter an account title |
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enter an account title |
The relevant journal entries are :
Date |
Particulars |
Debit |
Credit |
July 1 2020 |
Notes Receivable |
$ 1,417,737 |
|
Land |
$ 592,800 |
||
Gain on sale (901000-592800) |
$ 308,200 |
||
Discount on notes receivable ( 1417737 – 901000) |
$ 516737 |
||
(To record the sale of land) |
|||
July 1 2020 |
Notes Receivable |
$ 403,800 |
|
Discount on notes receivable |
$ 180,544 |
||
Service revenue |
$ 223,276 |
||
(To record the service revenue) |
Workings:
Year |
Cash Flows |
PV Factor @ 12% |
PV of cash flows |
A |
B |
A*B |
|
1 |
403820*3% = 12114.6 |
(1/1.12)^1 = 0.89286 |
$10,817 |
2 |
12114.6 |
0.79719 |
$9,658 |
3 |
12114.6 |
0.71178 |
$8,623 |
4 |
12114.6 |
0.63552 |
$7,699 |
5 |
12114.6 |
0.56743 |
$6,874 |
6 |
12114.6 |
0.50663 |
$6,138 |
7 |
12114.6 |
0.45235 |
$5,480 |
8 |
12114.6 |
0.40388 |
$4,893 |
8 |
403,820 |
0.40388 |
$163,095 |
Service Revenue |
$223,276 |
||
Notes Receivable |
$403,820 |
||
Discount (403,820-223,276) |
$180,544 |
Explanations:
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