Question

E7-13.  

(Note Transactions at Unrealistic Interest Rates)

(LO 4) On July 1, 2020, Agincourt Inc. made two sales.

1. It sold land having a fair value of $700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,101,460. The land is carried on Agincourt's books at a cost of $590,000.

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Help for you: There are two issues here and the fair value of the land is used as the basis for both

(1) calculate the gain on sale of land, use fair value as the benchmark for calculating the gain on sale

(2) calculate the discount on note as the difference between fair value of the land and the face amount of the note. The face amount of the note is debited to Notes Receivable.   

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2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000 (interest payable annually).

Agincourt 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 12% interest. (hint: look back in the notes to see whose rate of interest we used for discounting!)

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2020.

Answer 1

Solution

Gain on sale of land $ 110,000

Discount on notes receivable $ 401,460

No	Date	Account titles and explanation	Debit	Credit
1	July 1 2020	Notes Receivable	1,101,460
		Land		590,000
		Discount on notes receivable(1101,460-7,00,000)		401,460
		Gain on sale of land		110,000
2	July 1 2020	Notes Receivable	400,000
		Discount on notes receivable (note below)		161,553.30
		Service Revenue		238,446.70

Discount on Note receivable

Present value of $400,000 discount at 12% , n= 8 years

= $400,000 x 0.40388

= $161,553.30

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