= On January 1, 2016, Worthylake Company sold used machinery to Brown Company, a
ID: 2331521 • Letter: #
Question
=
On January 1, 2016, Worthylake Company sold used machinery to Brown Company, accepting a $25,000, non-interest-bearing note maturing on January 1, 2018. Worthylake carried the machinery on its books at a cost of $22,000 and a current book value of $15,000. 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%.
Required:
payment of the note by Brown on January 1, 2018
Jan 1,16 Notes Receivable 25,000
Accumulated Depreciation 7,000
Gain on sale of Machinery 4,929.85
Discount on Notes Receivable 5,070.15
Machinery 22,000
Dec 31,16 ???? 2,391.58
Interest Income 2,391.58
Dec 31, 17 ???? 2,678.57
Interest Income 2,678.58
Jan 1, 18 Cash ???? (NOT 25,000 as stated on another post)
Notes Receivable ????
Explanation / Answer
Answer
Notes Receivable face value (A)
$ 25,000.00
Present Value of Note (B)
$ 19,929.85
Discount on Notes Receivables (A – B)
$ 5,070.15
Period
Beginning Value
Interest at 12%
Ending Value
31-Dec-16
$ 19,929.85
$ 2,391.58
$ 22,321.43
31-Dec-17
$ 22,321.43
$ 2,678.57
$ 25,000.00
Date
Accounts Title
Debit
Credit
(1) 1 jan 2016
Notes Receivables
$ 25,000.00
Accumulated Depreciation
$ 7,000.00
Gain on Sale of Machinery
$ 4,929.85
Machinery
$ 22,000.00
Discount on Notes Receivables
$ 5,070.15
(machinery sold)
(2) Dec 31, 2016
Discount on Notes Receivables
$ 2,391.58
Interest Revenue or Interest Income
$ 2,391.58
(Interest earned recorded and adjusted)
(3) Dec 31, 2017
Discount on Notes Receivables
$ 2,678.57
Interest Revenue or Interest Income
$ 2,678.57
(4) Jan 1, 2018
Cash
$ 25,000.00
Notes receivables
$ 25,000.00
(Cash received)
Notes Receivable face value (A)
$ 25,000.00
Present Value of Note (B)
$ 19,929.85
Discount on Notes Receivables (A – B)
$ 5,070.15
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