Question

that took place on July 1, 2019 E7.14 (L04) Notes Receivable with Unrealistic Interest Rate) On December 31, 2019, Hurly Co. performed environmental consulting services for Cascade Co. Cascade was short of cash, and Hurly Co. agreed to accept a $300,000 zero-interest-bearing note due December 31, 2021, as pay ment in full. Cascade is somewhat of a credit risk and typically borrows funds at a rate of 10%. Hurly is much more creditworthy and has various lines of credit at 6%. Instructions a. Prepare the journal entry to record the transaction of December 31, 2019, for Hurly Co. b. Assuming Hurly Co.'s fiscal year-end is December 31, prepare the journal entry for December 31, 2020. c. Assuming Hurly Co.'s fiscal year-end is December 31, prepare the journal entry for December 31, 2021.

Answer 1

Hurly Co. Journal Enteries Trans. Particulars Notes Receivable a/c Dr. To Discount on Notes Receivable To Service Revenue Computation of present value of note: PV of $300,000 due in 2 years at 10% $300,000 x.82645 = $247,935 Debit in $ Credit in $ 300000 52065 247935 b. Dr. 24794 Discount on Notes Receivable a/c To Interest Revenue *$247,935 X 10% = $24,794 24794 C. 27271 Discount on Notes Receivable a/c Dr. To Interest Revenue *$52,065 - $24,794 27271 Dr. 300000 Cash a/c To Notes Receivable 300000