PROBLEM #2(worth 12 %) Notes Receivable-SHOW ALL YOU RV ORK! On December 31, 20x

Question

PROBLEM #2(worth 12 %) Notes Receivable-SHOW ALL YOU RV ORK! On December 31, 20x4, Kay Company sold a building that had an original cost of $750,000 and a book value of $400,000. In exchange, they accepted plus a promissory note with a face value of $400,000, a due date of December 31, 20x6, and a stated rate of5% December 31, 20X5. Under the circumstances, the appropriate rate of interest of 7%. ó, with interest receivable December 31 of each year beginning note is considered to have an 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) PV of the note: PV of the face value = 400000*PVIF(7,2) = 400000*0.87344 349376 PV of annual interest = 20000*PVIFA(7,2) =20000*1.80802 = 36160 385536 JOURNAL ENTRY: a) Entry to record the sale of building. 31-Dec-14 Cash 20000 Note receivable 400000 Accumulated depreciation-Building 350000 Building 750000 Discount on note receivable 14464 Gain on sale of land 5536 b) Entry to record receipt of interest on December 31, 2015. Cash (400000*5%) 20000 Discount on note receivable 6988 Interest income (385536*7%) 26988 Entry to record receipt of interest and face value of the note on December 31, 2016: Cash 420000 Discount on note receivable 7476 Note receivable 400000 Interest income = (385536+6988)*7% = 27476

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