Question 1 on uly, 2017, Cullumber Inc. made twa sales 1. It sold land having a

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Question 1 on uly, 2017, Cullumber Inc. made twa sales 1. It sold land having a fair value of $915,830 in exchange for a 3 year zerointerest bearing promissory note in the face amount of $1,252,520. The land is carried on Cullumber's books at a cost of 2. lt rendered services in exchange for a 5%, 6-year promissory note having a face value of $402,550 (interest payable annually) Cullumber Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 11% ,00 Record the two journal entries that should be recorded by Cullumber Inc. for the sales transactions above that took place on July 1, 2017. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to o decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically Indented when the amount Is entered. Do not Indent manually.) No. Date Account TItles and Explanatlon Deblt Credit 1. July 1, 2017 2. July 1, 2017 Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Date

Account Titles and Explanation

Debit

Credit

July 1, 2017

Promissory Note receivable

1,252,520

Land

597,600

Gain on Sale of Land

318,230

Discount on promissory note receivable

336,690

(To record sale of land in exchange of promissory note W.N 1)

July 1, 2017

5% Promissory note receivable

402,550

Service revenue

300,370

Discount on 5% promissory note receivable

102,180

(To record rendered service in exchange of 5% promissory note W.N 2)

Working Note

1.

Present Value of Promissory note due in year 3 at 11% = 1,252,520 *0.73119 = $915,830

A. Fair Value of Land

$915,830

B. Cost of land purchased

$597,600

C. Gain on sale of land (A-B)

$318,230

D. Promissory note Maturity Value

$1,252,520

E. Present Value of Promissory note

$915,830

E. Discount received on promissory note (D-E)

$336,690

2.

Computation of present value of 5% promissory note:

Maturity Value of 5% promissory note at 6- year = $402,550

Interest Per year = 402,550*5% = $20,128

Present Value of 5% promissory note due in 6 years at 11% = $402,550 *0.53464 = $215,220

Present Value of Interest receivable annually for 6 years at 11% = $20,128 *4.23054 = $85,150

Present Value of Promissory note = (215,220+85,150) = $300,370

Discount received on 5% promissory note = (Maturity Value – Present Value)

= (402,550 – 300,370) = $102,180

For reference Present Value table of 11% for 6 years

Year

P.V Factor at 11%

1

0.90090

2

0.81162

3

0.73119

4

0.65873

5

0.59345

6

0.53464

Total

4.23054

Date

Account Titles and Explanation

Debit

Credit

July 1, 2017

Promissory Note receivable

1,252,520

Land

597,600

Gain on Sale of Land

318,230

Discount on promissory note receivable

336,690

(To record sale of land in exchange of promissory note W.N 1)

July 1, 2017

5% Promissory note receivable

402,550

Service revenue

300,370

Discount on 5% promissory note receivable

102,180

(To record rendered service in exchange of 5% promissory note W.N 2)

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