Question

On January 1, 2016, Worthylake Company sold used machinery to Brown Company, accepting a $30,000, non-interest-bearing note maturing on January 1, 2018. Worthylake carried the machinery on its books at a cost of $21,000 and a current book value of $14,000. Neither the fair value of the machinery nor the note was determinable at the time of sale; however, Brown’s incremental borrowing rate was 12%.

Table 1 - Future Value of 1: fn,i=(1 + i)n

Table 2 - Future Value of an Ordinary Annuity of 1: FO,n,i=(1 + i)n−1i

Table 3 - Present Value of 1: pn,i=1(1 + i)n

Table 4 - Present Value of an Ordinary Annuity of 1: pO,n,i=1−1(1 + i)ni

Table 5 - Present Value of Annuity Due: pD,n,i=1−1(1 + i)n-1i+1

Required:

Prepare the journal entries on Worthylake’s books to record:

1.	sale of the machinery
2.	related adjusting entries on December 31, 2016, and 2017
3.	payment of the note by Brown on January 1, 2018

CHART OF ACCOUNTS
Worthylake Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 125 Notes Receivable 141 Inventory 152 Prepaid Insurance 162 Discount on Notes Receivable 173 Machinery 181 Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue 431 Interest Income 436 Gain on Sale of Machinery EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Prepare the journal entries on Worthylake’s books to record sale of the machinery on January 1, 2016. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Prepare the journal entries on Worthylake’s books to record related adjusting entries on December 31, 2016, and 2017. Additional Instructions

PAGE 2016PAGE 2017

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1		Adjusting Entries
2
3

Prepare the journal entries on Worthylake’s books to record payment of the note by Brown on January 1, 2018. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Answer 1

Prepare the journal entries as follows: Credit $ $ Debit 30,000 7,000 Date Titles and Explanations 1-Jan-16 Notes receivable Accumulated depreciation ($ 21,000 - $ 14,000) Machinery Gain on sale of machinery (S 23,910 - $ 14,000) Discount on notes receivable (To record the sale of machinery) $ 21,000 $ 9,910 $ 6,090 $2,869.20 31-Dec-16 Discount on notes receivable ($ 23,910 x 12%) Interest revenue (To record interest earned and adjusted) $2,869.20 $3,213.50 31-Dec-17 Notes receivable Interest revenue ($ 23,910 + $ 2,869.20) x 12%] $3,213.50 $ 30,000 1-Jan-18 Cash Notes receivable (To record cash received) $ 30,000 Working note: Calculate discount on notes receivable as follows: Particulars Notes receivable at face value Less: Present value of notes receivable (PV Factor at 12% for 2 years is 0.797 Discount on notes receivable Amount $ 30,000 $ 23,910 $ 6,090