Question

On December 31, 2019 Frost company performed engineering consulting services for Palmquist, Inc. Palmquist was short of cash, and Frost Co. agreed to accept a $230,000, zero-interest-bearing not due December 21,2021, as payment in full. Palmquist is somewhat of a credit risk and typically borrows funds at a rate of 8%. Frost is much more creditworthy and has various lines of credit at 5%.

Instructions: Prepare the following journal entries for Frost Co. YOU MUST SHOW SUPPORTING COMPUTATIONS TO RECEIVE FULL CREDIT!

a. Prepare the journal entry to record the transaction of December 31, 2019.

b. Prepare the adjusting journal entry for December 31, 2020

c. Prepare the adjusting journal entry and the collection of the note for December 31, 2021.

Answer 1

a.

Date	Account Titles & Explanation	Debit	Credit
31-Dec-19	Notes Receivable	$230,000
	Service Revenue		$197,188
	Discount on Notes Receivable		$32,812

Calculation-

Service revenue = $230,000*Present value factor for second year at 8%

Service revenue = $230,000*0.85734

Service revenue = $197,188

b.

Date	Account Titles & Explanation	Debit	Credit
31-Dec-20	Discount on Notes Receivable (197188*8%)	$15,775
	Interest Receivable		$15,775

c.

Date	Account Titles & Explanation	Debit	Credit
31-Dec-21	Discount on Notes Receivable	$17,037
	Interest Receivable		$17,037
	(230000-(230000*0.925925))
	(To record adjusting entry)
Date	Account Titles & Explanation	Debit	Credit
31-Dec-21	Cash	$230,000
	Note Receivable		$230,000
	(To record collection entry)