Question

On January 1, 2020 Cars A Us sold a fleet of cars to a car rental company accepting a 2%, 5-year note requiring interest payments at the end of each year. Cars A Us received a $20,000.00 down payment and a note with a face value of $260,000.00 in exchange for the cars. The cars had a cost of $220,000. A reasonable borrowing rate of 10% should be used. Prepare the journal entries to record the sale and 2020 and 2021 year end adjusting entries:

Answer 1

Computation of Issue price of the Note n Table values are based on 5 years i 10% per annum Cash Flow Amount Interest $ 13,000 (260000*5%) Principal $ 260,000 PV Factors 3.79079 $ Present Value 49,280 (13000*3.79079) 161,439 (260000*0.62092) 210,719 0.62092 $ Price of Note $ The issue price of the bond is $ 210,719 Ammortization Schedule Date Cash Received Interest Income Discount Amortized 01-Jan-20 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24 Totals $ $ $ $ $ $ 13,000 $ 13,000 $ 13,000 $ 13,000 $ 13,000 $ 65,000 $ 21,072 $ 21,879 $ 22,767 $ 23,744 $ 24,819 $ 114,281 $ $ 8,072 $ 8,879 $ 9,767 $ 10,744 $ 11,819 $ 49,281 Carrying Amount of Note 210,719 218,791 227,670 237,437 248,181 260,000 Credit $ Date General Journal 01-Jan-20 Cash Note receivable Sales revenue (To record sales made) Debit 20,000 210,719 $ $ 230,719 01-Jan-20 $ 220,000 Cost of Goods sold Inventory (To record cost of goods sold) $ 220,000 13,000 8,072 31-Dec-20 Cash $ Note Receivable $ Interest income (To record interest income and discount amortization) $ 21,072 13,000 8,879 31-Dec-21 Cash $ Note Receivable $ Interest income (To record interest income and discount amortization) $ 21,879