Notes Receivable On January 1, 2013, Crouser Company sold land to Chad Company,

Question

Notes Receivable On January 1, 2013, Crouser Company sold land to Chad Company, accepting a 2-year, $150,000 non-interest-bearing note due January 1, 2015. The fair value of the land was $123,966.90 on the date of sale. The company purchased the land for $120,000 on January 1, 2007. Is the amount Notes Receivable On January 1, 2013, Crouser Company sold land to Chad Company, accepting a 2-year, $150,000 non-interest-bearing note due January 1, 2015. The fair value of the land was $123,966.90 on the date of sale. The company purchased the land for $120,000 on January 1, 2007. What is the amount on the Discount on Notes Receivable journal entry for 2013 and 2014? Is the difference in amounts on the Discount on Notes Receivable for 2013 and 2014?

Explanation / Answer

Entry for the sale of land, as on January 1, 2013.

Note receivable ....................................................150,000.00

               Discount on note receivable.........................................................26,033.10

               Land..............................................................................................120,000.00

               Gain on sale of land....................................................................     3,966.90

(Fair value of the land is taken as the sale price and the difference between sale price and the Maturity value of the bill is the discount on the bill receivable. The profit would therefore be 123966.9-120000)

Entry for interest in 2013:

Discount on note receivable..............................12,396.69

              Interest income..................................................................12,396.69

(interest at 10% on $123,966.90)

Interest rate is ascertained as (1500000/123966.9)^2 - 1 = 0.10 = 10%

Entry for interest in 2014:

Discount on note receivable..............................13,636.41

              Interest income..................................................................13,636.41

(interest at 10% on $150000-(26033.10-12396.69)

The difference in the discount rate is due to the compounding effect. The second year interest = 123966.9(1.1)*0.1

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