Question

Problem # 3 (Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Tran Co. performed environmental consulting services for Hayden Co. Hayden was short of cash, and Tran Co. agreed to accept a $100,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayden is somewhat of a credit risk and typically borrows funds at a rate of 15%. Tran is much more creditworthy and has various lines of credit at 8%.

Instructions

1. Prepare the journal entry to record the transaction of December 31, 2015, for Tran Co.

2. Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

3. Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

Answer 1

ANSWER:

(1) Prepare the journal entry to record the transaction of December 31, 2015, for Tran Co.

DATE	ACCOUNT TITLES	DEBIT	CREDIT
Dec. 31, 2015	Notes Receivable	100,000
	Discount on Notes Receivable		24,386
	Consulting Revenue		75,614

Present value of Notes Receivable = $100,000 / 1.15 ^ 2

Present value of Notes Receivable = $75,614

(2) Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

DATE	ACCOUNT TITLES	DEBIT	CREDIT
Dec. 31, 2016	Discount on Notes Receivable	11,342
	Interest Revenue		11,342

Interest Revenue = $75.614 * 15%

Interest Revenue = $11,342

(3) Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

DATE	ACCOUNT TITLES	DEBIT	CREDIT
Dec. 31, 2017	Discount on Notes Receivable	13,044
	Interest Revenue		13,044
Dec. 31, 2017	Cash	100,000
	Notes Receivable		100,000

Interest Revenue = ( $75.614 + $11,342 ) * 15%

Interest Revenue = $13,043