PROBLEM #2(worth 12%) Notes Receivable-SHOW ALL YOUR wORK! On December 31, 20x4,
ID: 2588330 • Letter: P
Question
PROBLEM #2(worth 12%) Notes Receivable-SHOW ALL YOUR wORK! On December 31, 20x4, Kay Company sold a building that had an original cost of S750,000 plus a promissory note with a and a stated rate of 5%, with interest receivable December 3 1 of each year beginning December 31, 20X5. Under the circumstances, the note is considered to have an appropriate rate of interest of 7%. and a book value of $400,000. In exchange, they accepted $20,000 in cash face value of $400,000, a due date of December 31, 20x6, Instructions (a) Prepare Kay's journal entry to record the transaction on December 31, 20x4 (b) Prepare all the journal entries (if any) that Kay would record over the life of the note.Explanation / Answer
(a)
December 31, 2014
Cash A/c Dr $20,000
5% Notes Receivable A/c Dr $400,000
To Buildings A/c $400,000
To Profit on the sale of Building A/c $20,000
Being buildings sold for cash and promisory note
(b)
December 31, 2015
Cash A/c Dr $20,000 ($400,000 * 5%)
To Interest Income A/c $14,286 (($20000/0.07)*5%)
To 5% Notes Receivable A/c $5,714
Being Interest amount received on note.
Interest Income A/c Dr $14,286
To Profit & Loss A/c $14,286
Being Interest Income transferred to P&L A/c
December 31, 2016
Cash A/c Dr $20,000 ($400,000 * 5%)
To Interest Income A/c $14,286 (($20000/0.07)*5%)
To 5% Notes Receivable A/c $5,714
Being Interest amount received on note.
Interest Income A/c Dr $14,286
To Profit & Loss A/c $14,286
Being Interest Income transferred to P&L A/c
Cash A/c Dr $400,000
To 5% Notes Receivable A/c $388,572
To Difference in Interest A/c $11,428
Being cash received on promisory note.
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