Question

On January 1, 2019, Worthylake Company sold used machinery to Brown Company, accepting a $25,000, non-interest-bearing note maturing on January 1, 2021. Worthylake carried the machinery on its books at a cost of $21,000 and a current book value of $16,000. Neither the fair value of the machinery nor the note was determinable at the time of sale; however, Brown’s incremental borrowing rate was 10%.

Required:

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

1.	sale of the machinery
2.	related adjusting entries on December 31, 2019, and 2020
3.	payment of the note by Brown on January 1, 2021

PAGET GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT Jan. 1 Notes Receivable 25,000.00 Accumulated Depreciation 5,000.00 Gain on Sale of Machinery Discount on Notes Receivable Machinery 21,000.00

Answer 1

Answer:

- Interest rate = 10%, and Notes Receivable amount = $ 25,000 maturing after 2 years.

- PV of $1 at 10% for 2nd year = [ 1/(1.10)2] = 0.826446

- Present Value of Note = $ 25,000 * 0.826446= $20661.15

Discount on notes receivable = Notes Receivable face value - Present Value of Note

= $25,000 - $20661.15 = $4338.85

Period	Beginning Value	Interest at 10%	Ending Value
31-Dec-19	20661.15	2066.12	22727.27
31-Dec-20	22727.27	2272.73	25,000.00

Journal entries-

S.No.	Date	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Jan.1 2019	Notes Receivables	25,000
		Accumulated Depreciation (21000-16,000)	5,000
		Gain on Sale of Machinery		4661.15
		Machinery		21,000
		Discount on Notes Receivables		4338.85
		(To record sale of machine)
2.	Dec. 31, 2019	Discount on Notes Receivables	2,391.58
		Interest Revenue		2,391.58
		(To record Interest earned recorded and adjusted)
	Dec. 31, 2020	Discount on Notes Receivables	2272.73
		Interest Revenue		2272.73
		(To record Interest earned recorded and adjusted)
3.	Jan.1, 2021	Cash	25,000
		Notes receivables		25,000
		(To record receipt of payment)