Question

On July 1, 2020, Pharoah Inc. made two sales. 1. It sold land having a fair value of $904,970 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,423,984. The land is carried on Pharoah's books at a cost of $596,000. 2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $409,570 (interest payable annually). Pharoah 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 Pharoah 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 O decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer: Present value of the Note Receivable : $ 904,970 Discount on NoteReceivable : $1,423,984-$904,970 =$519014 Second Transaction: Face value of the note :8409,570 Present value of $ 409,570 discount at 18%, n=8 years - $ 409,576 X0,40388 = $ 165,417 Present value of annual interest of $12,287 ($ 409,570X37.) at 12% discount sate, n=8 years. = $ 12,287 X4.96764 = $ 61037 . Present value of total cash flows = $226,454. No Date Particulars Debit ($) credit ($) * Jul-1-2620 Note Receivable Alc Do 1,423,984 To Discount on Note Receimble 519,014 To land 597,600 To Gain on Disposal of land 307,370 2. Jul-1-2020 Note Receivable Alc Dr 409, 570 To Discount on Note 183,116 Receivable To Service revenue 226.454