On December 31, 2017, Wildhorse Co. sold equipment to Windsor, Inc. Wildhorse Co

Question

On December 31, 2017, Wildhorse Co. sold equipment to Windsor, Inc. Wildhorse Co. agreed to accept a $630,000 zero-interest-bearing note due December 31, 2019, as payment in full. Windsor, Inc. incorporated in 2017 and had very little credit history at the time of the transaction with Wildhorse. Therefore, at that time, Windsor typically borrowed funds at a rate of 10%. Wildhorse has a long and positive credit history. Therefore, Wildhorse has various lines of credit at 4%.

1.) Prepare the journal entry to record the transaction of December 31, 2017, for Wildhorse Co.

2.) Assuming Wildhorse Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2018.

3.) Assuming Wildhorse Co.’s fiscal-year end is December 31, prepare the journal entries for December 31, 2019.

Explanation / Answer

Wildhorse Co. sold equiment to Windsor, Inc. and agreed to accept a $630,000 zero-interest-bearing note due December 31, 2019, as payment in full. Wildhorse has various lines of credit at 4%.

Rate of Interest - 4%

Amount due on 31.12.19 - $ 630,000

PV = C / (1 + r)n

PV = 630000 / ( 1+ 0.04)2

= $582,470.41

1. Journal entry to record the transaction of December 31, 2017, for Wildhorse Co.

Zero-interest-bearing note $582470.41

To Equipement $582470.41

2. Wildhorse Co.’s fiscal year-end is December 31, journal entry for December 31, 2018.

Interest accured @ 4% = $582470.41 * 4%

= $23298.82

Journal entry -

3. Wildhorse Co.’s fiscal-year end is December 31, journal entries for December 31, 2019.

Interest accured @ 4% = $582470.41 * 4%

= $23298.82

Zero-interest-bearing note 23298.82 To Interest Accured 23298.82 Interest Accured 23298.82 Profit and Loss Account 23298.82

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