Question

On June 1, 2020 Night sold land to Blue Company in exchange for a $700,000 non-interest bearing note due on June 1, 2030. The prevailing rate of interest for a note of this type was not available. The cost of land to Night was $250,000. Night would have accepted $390,876 in cash for the land.

Answer the following questions with whole numbers.

1) Calculate the gain in sale that Night will record from the sale of the land.

2) Indicate the interest rate implicit in the note receivable.

3) Calculate the interest revenue in the December 31, 2020 income statement

4)Indicate the carrying value of the note receivable reported on the December 31, 2020 balance

5) indicate the total interest revenue that Nigh will record over the ten year life of the note

Please show all the work and numbers used so I can compare against the answer.

Answer 1

Required1

Gain on sale of land = $390,876 - $250,000 = $140,876

Required 2

Let interest rate be r

Therefore , Present value of $700,000 at r% for 10 years = $390,876

Using the PV table, r = 6%

Required 3

Interest revenue in the Dec 31, 2020 income statement = $390,876 * 6% * 6 /12 = $11,726

Required 4

The carrying value of the note receivable reported on the December 31, 2020 balance sheet = $390,876

Required 5

Total interest revenue to be recorded over 10 years = $700,000 - $390,876 = $309,124

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